When credit risks are effectively managed you meet the mandatory regulatory credit risk requirements and also go beyond the mandate and create better risk models for improvements in your business. The term credit risk evaluates the probability of the borrower not repaying the debt and thus causing loss. This practice is widely used by banks to estimate the reserves for loan loss and the capital position at any given point of time. Mitigating losses and improving credit risk practice is a major challenge in banks and other financial institutions.
The practice of credit risk management and its regulation was in the limelight recently when the global financial crisis caused a major credit crunch. The regulators felt transparency was lacking in the norms followed by banking credit risk evaluators and sought to ascertain that the associated risk of lending to customers would need thorough customer knowledge and credit risk evaluation. Changes and introduction of new Basel-III regulations would be burdensome felt the banks.
Though many banks have complied in meeting the stringent mandated regulatory requirements by overhauling their credit risk approach, training staff through credit risk management courses and absorbing the higher costs incurred in terms of capital costs incurred treating credit risk as a mere compliance measure is being blinded. Better risk management does provide banks with the chance to get competitive and improve their performance indices.
Credit and risk management challenges are many and due to
• Poor management of customer data and the inability to get the right data when it is most needed causing unnecessary delays.
• Lack of a modelling framework for group-wise credit risk implies that meaningful risk measures cannot and the banks are unable to generate the complex models that would provide a clear picture of the group-wide credit risk.
• Reworking model parameters are the Analysts task and are currently not amenable to change. Doing so actually affects the efficiency ratio of the bank and duplicates work.
• Risk tools are not comprehensive and without such a solution changes to identifying and re-grading portfolio concentrations affects the risk-solution itself and proves ineffective in credit risk management.
• Reporting tasks are cumbersome and the manual reporting methods using spreadsheets and other reporting processes cause an overburdening of IT staff and analysts.
Credit Risk Management Best Practices:
Evaluate the credit risk at multi-levels starting from the individual portfolio, client portfolio and then banking portfolio levels. This will provide a better and more complete understanding of the risks involved and lead to better overall risk management.
Banks data and risk profiles lie in SBUs and branches. Without integrating such data a thorough risk assessment or an integrated knowledge of risk-profiles makes assessing the risk of capital-reserve sufficiency, loan-loss reserves, and short-term loan losses difficult to assess or manage. That’s why both investors and regulators look closely at the credit-risk management practices used. Vulnerability to such non-transparently evaluated risks can lead to crippling losses.
The Effective Solution:
The only way out of this situation is to have robust solutions that reflect the exact relationship of credit risk profiles and the offsets for capital reserves and loan-losses. A quantitative well-integrated credit risk solution includes
• Model management that covers the entire credit risk lifecycle.
• Monitoring effectively and in real-time the credit limits and scores.
• Capacity for stress-testing of credit risk management.
• Capacity for data visualization and tools for BI to help place data at the right time in the right hands for enabled decision making.
Such a solution with simple portfolio curbs and measures should help banks ramp up to sophisticated and more transparent credit risk management practices and measures allowing for the need to grow and evolve with use and practice.
In modern day banking and new-age banking, a lot of technology has improved and continues to evolve banking practice especially risk management and compliance through better data analytics and predictive insights. Learn how such measures taught I credit risk management courses can help you specialize in banking.
At Imarticus Learning credit risk management is a part of our banking courses and goes a step forward by teaching you the analytical best practices to effectively handle credit-risk, compliance and regulatory measures. Always learn with the best! The banking and financial courses are par excellence with outstanding curriculum coverage, assured placement, soft-skill development and such modules that help you make a quick break into banking as a career.