Credit risk Management has always been the number one pain-area for financial institutions that also run risks such as operational risks, technological risks, talent risks, and liquidity risk. The recent financial crisis in capital markets and the role of banks brings attention to the existing risk management systems and how they fall short in actually managing their credit risks. The ILFS, Jet Airways and DHFL defaults are just a few among the major losses caused by the failure of their lenders and counterparties in timely delivery of monies in interest and capital on their contracts. A second recession and starved capital markets may be a reality waiting to happen. That’s exactly the hottest topic on the minds of investors, lenders, banks, NBFCs and Fintech industries among many others who will bear the brunt. This makes Credit risk Management a hot top-priority topic today.
The trending Credit risk Management topics currently are
1. Risk management and Modelling decisions need immediate attention with respect to the impaired assets IFRS9 norms of accounting.
2. The latest Basel regulatory standards will impact advanced banks. It is anticipated that a lot of change will happen in the analytical requirements and modelling norms, especially after the recent financial crisis.
3. How compliance will be impacted by the use of AI in making credit risk decisions both online and offline.
4. Issues of conducting due-diligence and credit risk analysis.
5. Capital lending risk management to NBFCs and Fintech startups.
6. Increased foreclosures, bankruptcies and bank profitability under the Basel III norms.
What the Credit Risk Analyst Does
Banks issue loans and the interest they earn is a primary source of revenue. A CR analyst finds roles in the companies offering credit cards, NBFAs, the credit, lending and risk management divisions of commercial banks, and financial institutions. Their role is crucial to the bank’s profitability and Credit risk Management to manage and assess credit risks, evaluate loan applications, ensure credit-worth of the borrower, monitor credit policy compliance and regulatory lending norms. The CR analyst could be either the one who is facing the borrower or may be needed to ensure other staff members are equipped for loan decisions with insights, customer data, and credit reports. Since the credit risk analyst deals with financial statement analysis, the borrower’s history of credit and borrowings, the market and economic regulations and rates they are able to assess the risk of lending and whether the borrower has sufficient financial standing and asset security to fulfil the contract by paying the interest and principal back in a timely fashion.
The CR role is vital in maintaining and servicing of
The debt/equity ratio should ideally be 1.0. Lower this figure sounder the financial condition of the borrower and higher the ratio greater the risk of defaults. This ratio is an important index of the financing of the company. Thus one can assess the repayment capacity and also indicates if such funding is from their own-funds or from borrowings.
Credit Default Swaps:
The CDS is an excellent way of risk reduction and management of the CDS risk in bonds, debt securities, fixed income, and other derivatives. The CDS seller is insuring the investment risk by swapping the risks for a fixed fee where the seller is guaranteeing the financial instrument in debt and the buyer’s investment.
Conflicts between borrowers and the lender’s interest:
This question is about key issues at stake. On the one hand, it is important to maintain excellent relationships with existing clients who may need multi-million dollars in a single application. On the other hand, is the risk to the bank if it lends and the loan goes bad especially when your assessment reveals the possibility of it being an unsafe loan.
The latest Basel III proposed rules require higher capital and prohibit the use of any other models. The inhouse-models and customized models are to be shown the door from 2017 impacting the economy, financial markets, debtors and creditors including the money market funds, trading books etc.
According to a Capgemini report, firms are now are viewing risk-management more urgently and from an enterprise-wide holistic view in their quest for innovative techniques to manage credit risks more effectively. They are stepping up their IT investment in risk management. Asia, Europe and North America account for the most IT spends on credit risk management with the investments in 2011 being double the amounts in 2008. Obviously, the analysts for risk management will see a sharp rise in demand. The roles of people with the know-how of management will be essential and lucrative too.
Cash-in on the trend by doing the Credit risk Management Courses at Imarticus Learning. You can learn the subject under the finance, data analytics, banking and other streams offered, to make you risk-ready. Start today!