Credit risk generally means the potential loss of finance of a company when the commercial borrower fails to pay the credit on time for any kind of debt. Thus, every corporate sector dealing with commercial lending must practice credit risk management to mitigate the loss by understanding the bank’s capital and loan loss reserves. The importance of improving credit risk management has increased over the years to enhance earning. In order to manage the credit risk properly, you must analyze the benefits and risk factors as well as take credit decisions and monitor the current borrowers. Let’s get to know how to practice credit risk more efficiently to make your business more successful.
Knowing the customers is essential for every lending business as it’s the first step to succeed in the credit process. The customer information and your relationship with customers would play a critical role in establishing you as a well-regarded financial service provider. As a reliable financial consultant, you must discuss your customers’ needs and future plans about their company and industry. Know about your clients’ company products and services, their customers, suppliers, facilities, etc. It would help evaluate the criteria to carry out the company’s business strategies.
Analyzing risk quantification involves estimating the probability of default, loss given default, and risk-adjusted return on capital. The borrowing company might publish unrealistic forecasts according to their sales and growth. This can have a negative impact on the lender’s margin. Thus, rather than using a manual process, utilize an automation process to analyze the company’s base data and evaluate soft factors. Moreover, analyze any risks that areassociated with the industry, business, and management of the company to evaluate whether the company’s balance sheet has enough capital to support credit risks or not.
There might be many risks associated with establishing a banking relationship with your customers. Thus, as a credit lender, you must know how the requested fund would be used and how the borrower would repay it. Moreover, you should identify, categorize, and prioritize the credit risks associated with the borrower as well as examine the quality and sustainability of the company’s financial performance.
In order to give credit approval, as a valued financial creditor, first, you should structure the deal by studying the nature of the business, the company’s economic conditions, and competencies or deficiencies in credit risk management. The loan structure is essential to the customer, and he/she should clearly understand within what boundaries the deal can operate. Also, determine the appropriate pricing for the deal, so the company can compensate the lender adequately. After closing the deal, you must monitor it regularly. If the borrowers pay their installments timely, it’s good. However, if they are delaying, it can cause potential loss. Thus, it’s essential to monitor the borrower’s development.
Today’s commercial lending businesses can no longer rely on standard tools to manage corporate credit risks. Customers’ requirements with financing are getting more and more complex, and they also demand faster decisions with credit financing. Due to the integration of AI and ML, now credit risk management can be processed fully or automated partially. This can positively support various financial service providers, financial analysts, and stakeholders with every aspect of the lending business.
Author: Yanhong OU
Date:16.10.2021
Reference:
Sas.com. 2021. Credit risk management: What it is and why it matters. [online] Available at: <https://www.sas.com/en_in/insights/risk-management/credit-risk-management.html> [Accessed 11 October 2021].
Carter, M., 2021. 7 Ways to manage credit risk and safeguard your global trade growth - Trade Ready. [online] Trade Ready. Available at: <https://www.tradeready.ca/2014/trade-takeaways/7-ways-manage-credit-risks-safeguard-global-trade-growth/> [Accessed 11 October 2021].
The Global Treasurer. 2021. Credit risk management principles, tools and techniques - The Global Treasurer. [online] Available at: <https://www.theglobaltreasurer.com/2019/02/07/credit-risk-management-principles-tools-and-techniques/> [Accessed 17 October 2021].
2021. Credit Risk Management Plan Best Practices | Euler Hermes USA. [online] Available at: <https://www.eulerhermes.com/en_US/insights/credit-risk-management-best-practices.html> [Accessed 14 October 2021].
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