Important Way to do Credit Risk Management
Credit Risk management is an important concept which involves managing the credit risk incurred by the banks and the financial institutions due to non-payment of loan dues by the customer. Credit risk management takes place by following a few steps namely Assess, Evaluate, Manage, and Measurement
Let’s understand these steps in detail
Assessing is the first step to understand the issue that is being crept up. Assessing basically involves the steps in understanding where the problem is and the rest of the steps of solving will only be successful when the first step is analyzed properly. Here the basic step is to know your customer. A customer and his needs have to be analyzed but at the same time knowing the risk appetite and the credit history of the customer is most important as it helps us to determine whether the customer will be able to pay back the debts on time. Also the information you gather and relationship you establish are critical to position yourself as a valued financial consultant
Once the first stage of assessment is done, then we evaluate the reasons and the issues surrounding the possibilities of the same. For eg. Once you have assessed the value of the customer and you find that the customer is deemed worthy to be provided credit help, then you evaluate the possibilities and repayment options so that you could maintain a healthy CRR by way of interests & principal amount recovery. This is the main step after assessment as you define the loan amount possibility for the customer and the required repayment pattern based on his risk assessment and return ratio.
In this method you basically structure the deal after determining the following aspects
- Nature of business
- Nature of Industry
- Impact of economic conditions
- Business Strategy
- Competencies & deficiency of the management
After this is done, you can then move on towards analyzing the financial reports both historical & forecasted. Understanding the profitability & cash flow along with liquidity & leverage is the key goal towards structuring the facility.
This is the last and final step in credit risk management marketing which basically involves 2 steps
- Presenting the deal
- Closing the deal
Once the risk analysis is done and the customer is well understood with regards to his risk return capability, you can present the deal with the payment plans and the pattern of repayment to the customers and this is the step which involves some kind of negotiations, based on the possibilities the collaterals are discussed and pledged upon. Once this is done final deal is closed with the customer and the amount is disbursed accordingly.