Simple Guide to Credit Risk Management

While there are a number of available tools that can assist a bank or lending institution in their Credit Risk Management procedures, there are some basic practices that form a foundation for assessment.  The credit report, when properly assayed, is the main instrument upon which to base a determination. 

The first step with Credit Risk Management is to have a clear and consistent strategy regarding your bank or company’s credit risk evaluation and analysis.  With a lending institution, the Board of Directors should periodically review the bank’s Credit Risk Management procedures and practices.  For any company or organization, having a comprehensible credit risk assessment and approval process will ensure more successful transactions.  It is also imperative that the policies be properly and effectively expressed to all relevant parties in the company or organization.    

A credit risk management protocol begins with a credit history report.  How that data is evaluated will help determine interest percentages, collateral required and payment plans.

The credit report should be reviewed in its entirety and the following questions considered:

·         What type of loans or credit accounts has the counterparty had?  Diversity shows a certain level of responsibility and is a major part of the credit profile. 

·         How much debt have they had in the past and how much now?  The consistent management of debt should figure heavily into Credit Risk Management and credit approval procedures.      

·         How long have they had credit and their accounts? 

·         How many and what sort of recent credit inquiries have they had?

Examining the information will reveal more than just focusing on the credit score and payment history.  For instance, the applicant may not have a pattern of late payments on their credit cards, but they were evicted from domiciles twice in the last couple of years for non-payment.  They have applied for their first auto loan in several years.  It could be reasonably concluded that if they didn’t meet their financial responsibility with regard to residence, they may not be consistent about paying for their car.  Sound credit risk management practice would involve further scrutiny by reviewing additional data such as an evictions report before granting the loan.  

Account Review should be included in the Credit Risk Management Plan.  Periodic examination of credit files to stay current on the status of loans and credit is crucial.  Early identification and again, having a clear policy on how to proceed with problem accounts, will fortify the strategy and thereby mitigate damage.