From minimising losses and remaining compliant, to experiencing a host of business advantages, effective credit risk management can help a lender in many ways. Here a few practical strategies to help banks and other financial institutions reduce their credit risk and manage their financial data.
Credit Risk Management has become the most vital business process for any lender or financial institution. It is a process through which lenders can better know the likelihood of any particular borrower defaulting on loan repayment or not fulfilling other contractual obligations.
Effective Credit Risk Management strategy helps lenders minimise losses and remain compliant with all the complex regulatory requirements while also providing them with a host of other competitive benefits. The growing importance has encouraged lending institutions to invest in credit risk and financial management heavily. Many of them now have in-house teams solely dedicated to credit risk management processes.
Here are some strategies that can help such businesses improve the effectiveness of their Credit Risk Management strategy-
- Know the Customers
Knowing and understanding your customers is paramount, especially if you are in the lending business. But to assess the credit profile of any company or individual, the latest and accurate data about them is a must. While the customer is obligated to share their financial details, lenders need more than the basic information as well as a report from a neutral third-party in order to improve the effectiveness of decision-making.
Detailed financial data of companies can be accessed from a reputed B2B database provider. These entities are involved in the business of collecting and maintaining company data.
- Analysing the Micro and Macro Risk
Risk management involves micro and macro risks. While a single loan or customer can be considered a micro risk, the overall loan portfolio is a macro risk. As a result, lenders should always analyse how a micro risk could impact them on a macro level. In other words, how a single customer or loan could affect their overall loan portfolio.
By considering the micro and macro risk, a lender would be able to effectively limit the size of the loan book or grow a particular portfolio further but, at the same time, prevent overexposure that could lead to a higher default rate.
- Experienced Underwriting
One of the most overlooked factors in creating an effective credit risk management strategy is experienced underwriting. While analytics in finance aspect of the company is crucial for lenders, underwriting has an essential role in the process. Ensure that the underwriters effectively apply all your risk guidelines and credit policies when underwriting a loan so that the involved risk could be accurately determined.
While exceptions are unavoidable in some cases, it might suggest that the underwriting guidelines need to be updated. Collect as much information as possible, internally and externally, so that informed decisions could be taken when a customer applies for a loan.
Mitigating Credit Risk While Accelerating Growth
Risk management and loan portfolio is about more than just effectively avoiding risks. The risk should be balanced in a way that opportunities are seized at the right time to accelerate business growth. While risk management is vital, it should not be so stringent that it negatively affects business growth.
Keep the above points in mind while working on your Credit Risk Management strategy to effectively minimize credit risk while also accelerating growth.