Risk Management in the Credit Loan Project
Mingyi Du
1,*,†
, Yingqi Xuan
2,†
, Yunxuan Zhang
3,†
and Anqi Zhu
4, †
1
New York University, New York, U.S.A.
2
University of Bristol, Bristol, U.S.A.
3
Beijing Institute of Technology, Beijing, China
4
Capital University of Economics and Business, Beijing, China
†
These authors contributed equally
Keywords: Commercial Banks, Credit Loan, Risk Management.
Abstract: The key to the business success of commercial banks is determined by whether they are willing to take risks,
whether they can properly control and manage credit risk. For the past few years, the national and international
economic and financial situation has been complicated. With the constant adjustment of national macro-policy
and banking supervision measures, solving the problem of national commercial bank credit risk management
under the new situation has become the priority of domestic banks. The goal of credit risk management is not
only to ensure the safety of the loans but also through credit risk management to improve the quality of
examination and approval of new loans and establish a good relationship between banks and enterprises.
Based on the relevant data that has been obtained, compared to the statistical data analysis, theory and
empirical analysis study, this paper explored the development of China's commercial bank credit markets and
the general laws by drawing on foreign commercial bank loan management's advanced experience combined
with the status of China's commercial bank loan management and empirical analysis and discussion by the
method of its existing loan management issues. Finally, after analysing the current situation of loan
management of China's banks, combined with foreign commercial banks' experience, this paper put forward
some improving strategies of commercial banks' loan management. We alter, optimize, and control each stage
of the project and minimize its risk within one stage to its least possible, and we achieve to manage the risks
of the project as a whole.
1 INTRODUCTION
1.1 Background History
Project management refers to the integration of
various systems, methods and personnel to complete
the various tasks of the project within the specified
time, budget and quality objectives. That is to plan,
organize, direct, coordinate, control and evaluate the
whole process from the beginning of the investment
decision of the project to the end of the project so that
the project objectives can be completed. For the
banking industry, the process of credit risk
management can be regarded as a project completion
process. Admittedly, the credit risk management of
banks has been paid more and more attention by
enterprises in practice, not only because the current
banking industry is experiencing the impact of an era
of crisis, but it is the foundation that determines the
survival growth and profitability of banks. The
concept of banking credit risk management first
appeared in the 1990s. Before the 1990s, credit risk
management was used to explain the technology and
risks associated with insurance. This kind of risk
management refers to purchasing traditional
insurance products suitable for any event to prevent
future hazards. In the financial investment market,
derivatives have also been promoted as risk
management tools for hedging activities. Derivatives
are not only used for hedging but these tools can also
be used for speculation and arbitrage. However, the
meaning of banking risk management is slightly
different from financial risk management. Even so, in
1997, the Basel Committee on Banking Supervision
issued the 'core principles' for effective bank
supervision, which provided an important link
between capital and risk containment. In particular,
banks need to adopt risk measurement and risk
management procedures and processes to ensure the
Du, M., Xuan, Y., Zhang, Y. and Zhu, A.
Risk Management in the Credit Loan Project.
DOI: 10.5220/0011345900003437
In Proceedings of the 1st International Conference on Public Management and Big Data Analysis (PMBDA 2021), pages 379-389
ISBN: 978-989-758-589-0
Copyright
c
 2022 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
379

risk-adjusted return of their enterprises (Information
on https://www.bis.org/publ/bcbsc125.pdf). The
core concept of credit risk management in the
banking industry is to ensure the safety and
profitability of the banking industry. In recent years,
due to the impact of the macroeconomic downturn,
real economy enterprises have encountered certain
difficulties in production and operation, credit
business default risks have increased significantly,
and the quality of credit assets in the banking industry
has shown a difficult situation. Therefore, credit risk
management in the banking industry has become
indispensable.
1.2 Research Status Quo
After almost forty years of research, the Chinese bank
sector has developed a relatively efficient and
complete risk management system in dealing with
credit risk. Our Chinese bank industry has grown to
demonstrate awareness and knowledge of identifying
and forestalling some credit risks to guarantee the
success of enterprises. However, in comparison to
western bank institutions, our bank industry is still
immature in managing credit risks. In general, this
immaturity is due to sufficient practical use of risk
management theory. Chinese bank industry adopts
certain management methods from prestigious
Western management models and integrates them
into our own credit risk management. Still, our risk
management system is under great improvements and
justifications since it is important to apply the
management methods that best suits our own
economic condition and policy. In addition, part of
our Chinese bank industry currently has a limited
understanding of risk management, which leads to
inattention and neglect to risks that harm the banks.
For example, our banks have a relatively
uncomprehensive pre-credit management risk
system. Our Chinese enterprises are more focused on
emergency management in the post-credit phase
rather than detecting the potential risks before giving
out loans in the pre-credit phase. As a result, the
Chinese bank sector is experiencing inadequacies in
estimating and judging the underlying credit risk and
standardizing performance appraisal systems for
credit loans. Hence, our bank industry is challenged
to improve, gain better insight and sharp intuition,
and set up comprehensive risk management
mechanisms and instruments.
1.3 Research Paper Structure
Our research will follow the structures as described
below. The first part is an introduction to our
research, summarizing the research background and
status quo. The second component focuses on our
main research content, introducing and analyzing
major instruments and tools in managing the credit
risk in three phases: pre-credit, mid-credit, and post-
credit. We will also demonstrate the process and
method of how authors extract and analyze the data
pertinent to the credit risk. What follows is the third
component displaying the results and discussions.
We will reflect on the examples we introduce in our
research and analyze the causes of failures and
successes. We will also provide conclusions and
propose solutions to practical issues in the domain of
credit risk loans in the bank industry. In the end, we
summarize and reflect on our studies, rethinking how
our research provides meaningful insights into the
development of prospective credit-risk management
in the Chinese bank sector.
2 METHOD
The credit loan project is crucial for commercial
banks. The article investigates the question of how to
successfully manage the credit loan project from its
three phases: pre-loan, mid-loan and post-loan.
There are countless examples that can prove that
risk management is essential to bank credit
operations. For example, in 2007, the Royal Bank of
Scotland chose to develop its credit business, not
using depositors’ funds, but using short-term loans
from other banks. The British Financial Services
Authority stated that the bank had not conducted a
detailed risk management investigation prior to this.
The increase in bad debts, the suspension of funds,
and the deterioration of its own financial situation
directly led to the bankruptcy of Royal Bank of
Scotland and the acquisition of 83% of its shares by
the government.
For analyzing risk management during the pre-
credit phase, we will use the literature research
method and case analysis method to study the risk
management of credit projects.
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2.1 Risk Management in Pre-loan
Phase
2.1.1 Evaluation of Pre-loan Risk
Management
Credit risk refers to the possibility that the loan
cannot be recovered on time, causing the loss of
credit funds and its income. We should be clear:
Firstly, credit risk is a probabilistic event, which may
or may not occur, and the loss studied only refers to
the possibility of loss, not reality; secondly, credit
risk runs through the business. The process of bank
credit management emphasizes the possible
consequences of risks before lending and requires
banks to pay attention to risks from time to time
throughout the credit activities and control and
reduce risks by improving the bank's business
management behavior. Credit risk cannot be
eliminated. It can only be controlled, reduced and
resolved. Credit risk will inevitably exist as long as
there is a credit category in social and economic
activities (Olaf 2011). Therefore, commercial banks
must strengthen the prevention of credit risks in their
capital operations and try their best to avoid losses
caused by bad debts.
In the bank's pre-credit business, it is necessary to
fully understand the customer's credit rating and the
customer's financial status. After conducting business
with customers, they also need to track and supervise
their customers. If supervision is not in place, it is
easy to cause customers to default or overdue credits,
thereby affecting the bank's business development.
In the pre-credit investigation, some account
managers did not pay attention to the authenticity and
completeness of the relevant information; they did
not clarify the true use of the bank loan (especially
when issuing short-term credit); the review was too
optimistic and did not analyze the potential of
changes in related factors Influencing factors, in-
depth market review, insufficient understanding of
business management status and the future, and
thorough risk reassessment; inaccurate assessments
and insufficient coverage of credit risks; and
ineffective identification of group customers and
related company risks. The above factors damaged
the following loans in the initial stage.
In addition, some banks ignore problems such as
incomplete loan procedures and insufficient review
materials; some implement anti-procedures, such as
issuing loans before enterprises apply for loans,
signing loan contracts before loan approvals, issuing
letters of credit or bank acceptance drafts before
approval, etc.; merger credit extensions have not been
granted (Olaf 2011). Fully cashed, the credits to some
group members were not included in the consolidated
credit management; lending in violation of
regulations, that is, lending beyond authority,
dividing a large sum into several small pieces,
avoiding authority restrictions, rolling out bank
acceptance bills to capital enterprises, or when there
is no actual Issuance of acceptance bills, discounts,
etc. in the context of trade.
2.1.2 Existing Problems in the Pre-loan
Control of Credit Risk of Chinese
Commercial Banks
1) The establishment of functional credit departments
is unreasonable. Commercial banks currently set up
industrial and commercial credit, project credit,
housing credit, and other departments have the same
functions, segmentation, easy to indulge in
standardization circles such as sub-indices,
competition for scale, etc. Commercial banks
conduct research on credit markets, develop
customers, and formulate credit management
strategies. Insufficient research on the objective
requirements of credit operations in China is not
conducive to effective prevention and control of
credit risks. In addition, they have integrated pre-loan
inspections, loan-time inspections, and post-loan
inspections and lack a mechanism for mutual restraint
and checks and balances (Olaf 2011).
2) The risk management institution is not sound.
The credit risk management team still cannot be self-
contained from top to bottom like Western
commercial banks and lacks a strong system.
However, the credit business department and the
credit management department are not
administratively separated. The review opinions of
the credit management department often do not have
a substantive restrictive effect, and the improper
phenomenon of "outsiders managing insiders" is
prone to appear (Olaf 2011).
3) Weak implementation of the credit system.
Most commercial banks in China have not yet
established a dedicated credit decision.
The policy agency is responsible for the bank's
credit policy, management system and customer
credit rating standards. However, the business
department has no rules to follow. It can only conduct
business management according to the traditional
scale and ratio indicators, which cannot guarantee the
effective operation of the entire credit mechanism. In
addition, there is no special department to evaluate
and inspect the compliance of credit policies, work
procedures, and operating standards by business
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381

departments, which has led to many business
departments appearing in ultra vires loans and illegal
loans (Olaf 2011).
2.1.3 Case Study: China Construction Bank
At present, the pre-lending risk management
department of CCB's LC branch operates in
accordance with the relevant requirements of the
Guidelines for Due Diligence of the Construction
Bank's Pre-lending of Corporate Credit Business and
other documents. In the actual operation process, the
account manager account manager of each branch
and the risk manager of the bank conduct pre-loan
investigations on credit customers. The basic process
of the pre-loan investigation includes business
acceptance, pre-investigation preparation,
implementation of the investigation, and writing of
the investigation. Six stages of manuscript,
investigation review and investigation review. Every
detail in the front and back process is interlinked. If
there is an omission in a certain link, it will leave
hidden dangers for later risk research and judgment
and control. The long management process and high
professional knowledge requirements have caused
banks to manage the pre-loan inaccurately and
superficially. In many cases, problems are discovered
and solved in the loan, which cannot be controlled in
the pre-loan link (Chen 2019, Christian 2015).
In this case, during the pre-loan review, China
Construction Bank discovered that Group B had two
companies with credit balances in the CCB LC
branch, namely Company A and a new material
production company, with credit balances of 89.7
million yuan and 129.87 million yuan, respectively.
The group's credit balance in the LC branch of China
Construction Bank totalled 21.57 million yuan. As a
result, the construction bank LC branch loan is
expected to lose 160 million yuan, with a loss rate of
73%. Among them, A company lost 62.98 million
yuan, recovered 26.72 million yuan, a loss rate of
70.21%; G new material is expected to lose 97.28
million yuan, recovered 32.59 million yuan, a loss
rate of 74.92%. The detailed analysis of the evolution
process of company A's credit business quality
migration is as follows:
(1) In August 2014, Company A issued a letter of
credit advance with ICBC. In January 2015, it owed
interest in the local Rural Commercial Bank, and in
July, it owed interest in the LC branch of China
Construction Bank. The bank's LC branch failed to
settle the payment due to the bank acceptance
business and formed advances. From November 2015
to January 2016, it handled the refinancing business
for it. After that, interest arrears occurred. The
classification was lowered on September 30. The
loan was overdue in the LC branch of China
Construction Bank in November 2016, and it was
adjusted to the suspicious category in March 2017
(Chen 2019).
(2) In October 2014, the new material production
company had advanced payments and interest owed
in other banks. From April to July 2015, the new
material production company temporarily suspended
production and owed the interest of the LC branch of
China Construction Bank. The company settled all
the debts at the end of 2015. From 2016 to 2017, the
new material production company maintained its
operations and repaid the loan interest from the LC
branch of China Construction Bank every month. In
May and December 2016, the company was involved
in the "import and export agency contract dispute"
case. The construction was completed on December
30, 2017. As a result, the LC branch of the bank
downgraded the classification to substandard. In
January 2018, it began to default on the interest of
CCB LC Bank. In February 2018, the loan was
overdue in LC Bank, and then it was adjusted to the
suspicious category in March (Chen 2019).
2.2 Risk Management in the Mid-credit
Phase
To analyze risk management during the mid-credit
phase, we employ the methods of document analysis
and case study.
2.2.1 Mid-credit Risk Management
Summary
Right after the loan is issued, the whole loan project
enters the phase of mid-credit. Good mid-credit
management practice is the second line of defence
against potential risks, and it is crucial for the safety
and securities of loans belonging to banks. We have
seen a great quantity of non-performing loans present
because of inadequate pre-credit investigation and
review, which further led to a lack of investigation
reports and credit-loan documentations regarding the
bank's loan customers. As a result, it creates
difficulties for banks to perform mid-credit reviews
and investigations. For mid-credit loan audit and
review, administrators should review the credit loan
materials carefully and independently, follow up with
borrowers to supplement the missing documentation
and materials needed according to law and protocol,
and scrutinize financial reports, investigation
documentations to expose any potential risks
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associating with non-performing loans. The auditors
of banks should make sure that all documentations
are legal and valid and issue investigation and audit
reports regarding the loan customers to ensure the
validity and safety of loans (Information on
https://blog.csdn.net/hajk2017/article/details/81
325661)
.
Through the documentation analysis method, we
find out that major Chinese commercial banks
employ various mathematical models to perform
quantitative analysis, including prediction model,
decision model, and linear programming in decision-
making regarding credit loans. Banks determine
borrowers' loan qualification and loan amount mainly
based on analysis of their documentation, such as
financial reports. The credit loan project usually
starts when company borrowers submit their loan
applications to banks, and banks perform their
analysis on borrower companies and projects they use
loans for. After banks issue the written evaluation
report, the Risk Management Department will
establish panels of specialists to review the
evaluation report and feedback to the Risk
Management Committee. Finally, after all the legal
process, the loan is issued (Wang 2010, Basic system
of credit management, Baidu Wenku).
2.2.2 Case I
Since 2008, The steel market industry opened by
Commercial Banks of Fujian began to transfer from
Shanghai to Wuxi. During this transfer, the strong
investment aspiration of Steel trade business entities
coincides with the willingness of Fujian Commercial
Banks to expand credit loan business. As a result, the
Banks lent too much and bankrolled the bubble,
which reached its peak in 2011. At the same time, the
number of programs that commercial banks require
their branch to achieve is over 40, and commercial
banks also require their branch to triple the deposit.
Under these requirements, many bank branches start
to issue loans without careful investigations, and
credit-loan risks arise (Dai 2013).
In late January 2012, Bank A actively made
efforts to make sales for Company B. In April 2012,
Bank A provided Company B with 50 million
comprehensive credit lines, and Shanghai Huashi
Company undertook a joint liability guaranty. In June
2012, Bank A issued a total of 60 million bank
checks, which utilized 30 million exposures. In June
2012, Bank A granted 200 million indirect credits to
Company B, financing for downstream steel
distributors in an advance payment mode. Until
August 2012, an estimated total of 180 million were
used by Company B for the advance payment
process. The difference between the purchase price
and sale price will be refunded. Company B made
advance payments to Shanghai Huashi Company, and
Huashi Company shipped the goods to warehouses of
Shanghai Guangji Logistics Co., Ltd. All the
transactions were made on the spot. The downstream
distributors made 30% advance payments, and a
third-party Zhongchu Logistics supervised all the
steel goods. Company B had the ownership of goods,
and downstream distributors could make payments
and obtain the goods in batches. If Company B could
not make repayments, Shanghai Huashi Company
would guarantee to buy the remaining steels. At the
end of August 2020, the Head Corporation of
Company B found out that parts of steel kept in
Shanghai Guangji Logistics Co., Ltd were double
pledged by Company B's upstream firm, Shanghai
Huacheng materials co., Ltd. On 24th September
2012, the Head Corporation of Company B
announced that they will appeal to Municipal
Intermediate Court to recover against 803.63 million
RMB non-payment and steel goods owed by
Company B's supplier, included 209.24 million RMB
granted by Bank A (Cai 2011, Zou 2012, Zhou 2013).
Table 1: Transaction detail chart.
Transactions Date
Quantity RMB（
ten thousands）
Bank A provided
B credit line
2012.4 5000
Bank A issued 5
bank notes
2012.6 6000
Bank A provided
B indirect credit
line
2012.5 20000
2.2.3 Case II: Bank of China
One sub-branch of Bank of China signed an
Individual first-hand housing loan agreement with a
personal borrower and the real estate development
company. The agreement specifies that the sub-
branch of the Bank of China issues a total amount of
64 thousand RMB of loan within a time limit of 300
months. The personal borrower agreed and
authorized the Bank of China to send the loan directly
to the Real Estate Company to buy a house with a
monthly interest of 6.0042%. The borrower pledged
the house as security for the loan, and the Real Estate
Company provided the joint liability guaranty.
During the agreement periods after the loans were
issued, the borrower already had several overdue
Risk Management in the Credit Loan Project
383

payments to the Bank. The Bank of China tried to
contact the borrower several times but failed due to a
borrower's permanent address change. Therefore, the
Bank of China had no other way but to prosecute the
borrower and Real Estate Company in court. The case
was dismissed because the borrower did not show up
and the Bank of China did not submit enough
evidence on the borrower's refusal to pay the loan
(Shen 2013, Zhao 2012, Wang 2017).
2.3 Risk Management in Post-credit
Loan Phase
To analyzing risk management during the mid-credit
phase, we employ the methods of document analysis
as well as comparable case analysis.
2.3.1 Data and Summary
When obtaining data associated with post-credit loan
risk management analysis, we employ methods of
documentation analysis to understand the concepts
and characteristics of post-credit loan management
and perform comparable case analysis on post-credit
risk management, making a comparison between
foreign and Chinese commercial banks.
Post-loan risk management means the
management from the time loan is issued to the time
when loan principal and interest are repaid. Thus, it
is the last activity in the whole process of loan project
management (Yang 2014).
2.3.2 Comparable Case Studies
(1) Case I: Citibank (Zhang 2014)
We first analyze the post-credit loan management by
Citibank, N.A. Citibank was founded in 1812 as the
City Bank of New York. Citibank was merged with
Travelers Group to establish Citigroup, one of the
largest financial services giants. Citigroup has
divisions including Citibank, Salomon Smith Barney,
Banamex, Citifinancial and other 13 financial
services enterprises with assets over a trillion dollars.
Citigroup has its branches in 150 countries and
regions with employees over 27 thousand. The
financial products provided by Citigroup ranges from
enterprise and investment banking services to credit
loans, insurance, brokerage, financial consulting, etc.
As a bank that develops global business, its business
branches include credit cards, private banking
services, corporate banking services, multinationals,
and emerging markets business, helping Citibank
gain advantages unmatched by other banks.
Regarding the post-credit loan risk management
approach, Citibank believes that risk prevention is
better than risk governance; voluntary target market
setting is better than passive remedial action after
risks happen; active commercial advertisement is
better than passive risk aversion. Citibank's
management system is detailed in figure 1 below.
Figure 1: Citibank's post-loan management mode (Zhang 2005).
Citibank proposes to be proactive when dealing
with post-credit loan risk. First, Citibank determines
market admittance by analyzing specific industry life
cycles. Citibank decides that it is accessible to enter
industries in the growth stage and in a mature state.
As for sunset industries and industries in recession,
the market admittance for financial credit funds is
very limited and restricted. Second, Citibank
performs portfolio analysis on the loan project,
including factors such as geography, transaction type,
borrower's background, collateral information to
investigate and monitor. Third, they use dynamic risk
measures to ensure that credit funds are issued
following protocols, make the risk under control, and
calculate the expected returns.
(2) Case II: Industrial and Commercial Bank of China
Limited
The Industrial and Commercial Bank of China
Limited, also known as ICBC, is the biggest state-
owned Commercial bank in China and is also one of
the Fortune 500 companies. ICBC has been ranked as
the largest bank in the world for five consecutive
years up until 2012. Since its establishment in 1984,
ICBS has always regarded "providing excellent
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financial services" as its mission. ICBC has been
financing both internationally and domestically and
raising social funds broadly to provide financial
support for the development and reform of
enterprises, which further contribute to China's
economic development.
Regarding the personal housing loan, ICBC
studies and formulates administrative methods
according to Provisions of INDUSTRIAL and
Commercial Bank of China on strengthening post-
loan management to regulate the post-credit loan
management, prevent and control potential risks,
ensure the quality and efficiency of personal housing
loans, etc. ICBC enacts administrative methods in the
post-credit loan phase and divides loans into five
class loan classification based on risk level. For the
normal loan activities, the Bank will conduct post-
loan supervision by means of regular selective
examination. For the other four classes of loans, the
Bank will conduct a complete and comprehensive
inspection. At the same time, ICBC set specific
requirements on the intervals between inspections.
The inspection frequency is significantly higher for
the class of loans with a high risk level (Information
on www.pbc.gov.cn).
The general process for post-credit inspection is
described below in the chart:
Figure 2: General procedures for post-loan inspection.
When loans are due, the Credit Control officer
will send out a reminder notice in advance. For
defaulted loans, Banks could charge a penalty fee,
stop the outstanding loan, deal with the pledges by
regulation, and recourse to the guarantor for joint and
several liabilities. In addition, the Bank must conduct
a risk assessment on loans 90 days before due. Then,
the Banks would formulate emergency measures for
potential defaulted loans. When one month before
due, the Bank must analyze the overdue default risk
again. All the branches of the Bank must take
initiatives to prevent and defuse overdue risks
(Information on www.cbrc.gov.cn).
3 RESULTS AND DISCUSSIONS
3.1 Pre-credit Loan
Pre-loan risk management is the first hurdle in the
credit management process, and it is also a more
important process link. It is the basic basis for
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385

customer screening and credit plan judgment and the
bridgehead for actively avoiding credit risks and
ensuring the quality of credit assets (Christian 2015).
3.1.1 Case Analysis of Pre-loan Risks
(1) In the process of group relationship sorting, the
group customer relationship was not identified in
accordance with the principle of substance over form,
and the identification of companies controlled by
family members within the range of three generations
directly and two generations was insufficient
(Information on
https://www.mckinsey.com/business-
functions/risk-and-resilience/our-
insights/banking-models-after-covid-19-taking-
model-risk-management-to-the-next-level)
.
(2) Failure to carefully analyse customers'
production and operation needs, resulting in
excessive credit extension. In 2010, when the new
material production company declared a general
quota of 54 million yuan and calculated based on the
production capacity of 60,000 tons of the two
production lines, it was concluded that the trade
financing business demand was 9.072 million yuan.
In 2011, the company only put into production one
production line, and the actual production capacity
was 36,000 yuan. Based on the exchange rate of 6.63,
the company's actual import volume was
270,291,900 yuan. Various financial institutions have
handled import letters of credit services for the
company in a cumulative amount of 310,114,000
yuan, exceeding the enterprise's actual production
and import demand. In April 2012, the new material
production company had a credit line of 7 million
yuan, increasing 16 million yuan compared with
2011. At the end of 2012, the balance of the forward
letter of credit opened with various banks was 272.25
million yuan. After inquiring about customs data, the
new material production company's annual import
volume in 2012 was 34.82 million dollars, converted
into 216.93 million yuan based on the exchange rate
of 6.23 in December 2012. Without considering the
term of the letter of credit, the amount of bank credit
has far exceeded the actual credit limit of the
enterprise. In April 2012, Company A had a credit
line of 50 million yuan, an increase of 30 million
yuan compared to 2011, with a credit line of 415.0
million yuan in various banks and a stock loan of
31,583,77 million yuan (including low-risk
businesses). In 2011, Company A had total assets of
59.674 million yuan and realized sales income of
85.83 million yuan. According to the company's size
and sales income, the company's business capital
needs did not match the total amount of bank credit
(Chen 2019, Information on
https://www.mckinsey.com/business-functions/
risk-and-resilience/our-insights/banking-
models-after-covid-19-taking-model-risk-
management-to-the-next-level
).
(3) Failure to consider the potential impact of
changes in the economic environment on the
borrower's ability to repay the principal and interest.
For all loans, the most important thing is information
about the borrower's current financial situation, the
expected use of the loan, and the probability of
successful operation of the financing project. In
practice, account managers often fail to make clear
economic expectations for the target borrower. For
example, as the growth rate of the market economy
slows, company A's profitability declines. The group
was affected by the slowdown in domestic economic
growth, and the overall plastic products industry was
in a downturn. As a result, the profitability of
company A and the new material production
company both experienced a serious decline. The net
profit of company A has declined year by year since
2014. And it fell to 2.4 million yuan in 2016, and the
net profit of new materials production companies
dropped from 13.325 million yuan in 2014 to 5.27
million yuan in 2016 (Chen 2019, Information on
https://www.mckinsey.com/business-
functions/risk-and-resilience/our-
insights/banking-models-after-covid-19-taking-
model-risk-management-to-the-next-level
).
3.1.2 Results and Discussions
Banks can gradually form a proactive ability to
manage credit risk and can control the risk as far as
possible in the link before lending. With the support
of this ability, establishing a scientific and reasonable
risk management system is the only way to build the
core competitiveness of modern commercial banks. It
is also a final requirement of risk management. In the
process of customer selection and judgment, all links
need to be strictly controlled. Therefore, no matter
the micro or macro factors, the customer itself or the
external environment, it is necessary to in-depth
analysis and analysis, effectively select the risk pre-
lending management target, and arrange the follow-
up risk treatment measures are crucial.
3.2 Mid-credit Loan
The mid-loan phase can be seen as the in-process
inspection stage in project management. Whether the
project will be executed successfully is being
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reviewed during this stage. Therefore, it is extremely
crucial to detect any potential risks in the mid-credit
loan phase.
3.2.1 Risk Analysis
Case I:
The risk occurred because of the following:
(1)The risk detection in the pre-loan
investigation was insufficient. Moreover, because the
steel industry was extremely popular at that time, the
bank neglected necessary investigation regarding
crucial process implementation in this loan project.
(2)The investigation about Shanghai Huashi
Company is superficial.
(3)The check and examination on the credit
review process are not rigorous at all. The provision
of Bank A states that only companies with credit
ratings above AA are qualified to get credit lines for
the purpose of trade financing business. In our case,
Company B is only a newly founded company
(founded in 2011) with a credit rating of BBB. It is
an obvious break of rules when a BBB company
could obtain a total of 250 million RMB of indirect
and direct credit lines. The bank relaxed the credit
rating requirement because it believed the steel
industry had a bright prospect. It reflects the lack of
rigorous mid-credit inspection and the too simplistic
credit review process.
Case II:
The reasons why the loan project failed in case
II is analyzed as followed:
(1)The internal control organization is
immature. The failure to catch up with the loan
borrower is because relevant procedures and
documents related to loans were not supplemented in
time. As a result, the Bank of China did not recognize
who was ultimately responsible for the overdue loan,
which led to the dismissal of the case due to a lack of
evidence.
(2)The tracking and warning mechanism is
incomplete. The Bank of China failed to notice the
change in borrowers' financial condition and credit
condition and therefore failed to alert the significant
risk of overdue payments. The Bank only noticed the
alert until the Borrower could not repay the loan on
time. At this time, it had become impossible to trace
the borrower.
(3)Serious problems associated with credit
approval mechanism. The credit approval system in
China relied heavily on the relevant investigation
report that demonstrates potential risks in the pre-
credit loan phase. Thus, the quality of credit approval
was heavily dependent on the validity of the pre-loan
investigation report. If the validity and reliability of
the pre-loan investigation are absent, then the
borrower's credit rating is influenced and lead to non-
performing loans in the end.
3.2.2 Results and Discussions
Based on the analysis above, we believe that it is
crucial to address the following issues in the mid-loan
phase:
(1) Emphasize the construction of a credit risk
control environment
We need to improve the overall professional
quality of the banking staff. On the one hand, it is
urgent to improve Banking staff's professional skills
and quality of loyalty. On the other hand, we need to
enhance staff's risk awareness. We also need to
establish a rational assessment and accountability
mechanism for credit-loan business. The risks are not
detected in time because of the lack of supervision
and monitoring, as seen from the above two cases.
Therefore, building an effective and rational credit
appraisal and assessment system improves personnel
quality and gives them a greater incentive to identify
potential risks. In addition, an effective
accountability mechanism is essential to trace
responsible personnel when related issues arise. In
this way, the banking industry staff would have a
more responsible behavior to fulfill their duties and
avoid abusing authority, playing favoritism, and
committing irregularities.
(2) Always pay attention to affiliated enterprises'
credibility condition
Banks are supposed to choose their client
company cautiously when carrying out credit loan
business. After the routine investigation in the pre-
loan phase, banks should scrutinize the enterprise's
operating capacity and credit condition because they
are in constant change. Therefore, it is recommended
for Banks to provide credit loans for client companies
with outstanding main business, above-average
production indicators and dynamic cash flow.
(3) Perform strict monitor and re-valuation on
collaterals periodically
Banks needs to obtain information on whether the
values of collaterals have changed dramatically,
whether collaterals are double-pledged, or whether
the company sells them off.
(4) Apply multiple guarantee methods to
diversify credit risks
For enterprises with tight cash flows, Banks could
carry out a guaranteed mortgage on the enterprise's
intangible assets such as patents, technology, etc.
Thus, it promotes the development of some small and
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387

medium-sized enterprises with tight cash flows to
obtain credit loans. One issue worth noting is that the
Banks must ensure the intangible assets carry values
and there is no potential dispute when dealing with
patents.
3.3 Post-credit Loan Risk Management
Post-loan risk management is an important link in the
credit risk management of commercial banks and a
key guarantee to ensure the recovery of loan principal
and interest. Based on the methods and data described
in section 2.3, we focus on providing analysis on the
status quo of Chinese Banks, obtaining results and
conclusions, and providing improvement measures.
3.3.1 Results
We conclude that the major problems associated with
Banks' post-loan management including (Zhang
2014):
(1)Lack of clear post-loan management concepts.
The majority of Chinese banks recognize losses after
the loan losses took place. Therefore, the major issue
in the bank industry is that banks focus on loan
expansion but neglect the subsequent necessary
management of loans.
(2)The post-loan management system still needs
to be improved. The Credit management department
performs the post-loan administrative function,
which means that the loan sales and post-loan
inspection are all performed by the account manager.
The lack of post-loan investigation and management
from independent supervisory authorities makes it
hard to yield the post-loan management well.
(3)The lack of effective performance appraisal
and reward and punishment mechanism. Banks in
China recognize profits when loans are issued and
losses when loan losses take place. Correspondingly,
Banks in China have strong rewards for loan
origination but rather a small reward for post-loan
management.
(4)Lack of talents for post-loan management. As
the scale of credit services expands, the expectation
for staff's professional competence and working
experience is extremely high and demanding. Not
only it requires knowledge of the law, finance, and
accounting, but also it demands broad experience in
identifying, analyzing, and handling risk signals.
3.3.2 Discussion.
From the information above, we could learn from
banks in the western world to improve deficiencies
existing in our China Banks' systems.
The measure we adopt to improve post-loan
management includes
(Zhao 2013):
(1)First, reinforce the important position of post-
loan management in all aspects. China's commercial
banking industry must strengthen the professional
skills training of loan officers at the basic level. Third,
enhance the bank employees' overall quality and risk
awareness.
(2)Promote the establishment of the post-loan
management system. For example, the establishment
of a risk warning system is vital. Also, Banks should
make full use of People' Bank of China's credit
information system and the China Banking
Regulatory Commission (CBRC) 's customer risk
monitoring system and the like.
(3)Establish reward and punishment mechanisms.
Establishing an effective reward system provides
great incentives for post-loan management staff.
(4)Establish a team of credit officers with great
professional skills and qualities. Hiring staff with
great qualities is crucial for protecting against credit
risk and for the security of the Bank's revenue.
4 CONCLUSION
In conclusion, China's current credit risk
management is not perfect, and there is plenty of
room for improvement and development. As the
globalization process continues, China's commercial
banks have also been in line with international
standards. However, competing with international
banks brings a complex environment and greater
uncertainties. Thus, Commercial banks in China has
a challenging mission to improve their credit loan
business and minimize risk by providing better risk
management. This article analyzes varieties of issues
associated with the Bank's credit loan business from
the perspective of project management. Regarding
the credit loan business as one project, we analyze the
project in three different stages: pre-loan, mid-loan,
and post-loan. These three stages constitute the whole
credit-loan project, and we alter, optimize, and
control each stage of the project and minimize its risk
within one stage to its least possible. This way, we
could achieve to manage the risks of the project as a
whole. At the same time, a sophisticated risk
management system not only help banks achieve
sustainable development, but also improves their
impact on the industry. Thus, we should emphasize
on the effort of risk managing and actively obtain
deeper understanding of credit loan risk management.
It is crucial to enact a credit risk management system
that is in conformity with national conditions.
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