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Credit scoring
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Credit analysis
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Credit monitoring
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Credit mitigation
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Credit risk management
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Credit risk is the possibility of losing money or reputation due to a borrower's failure to repay a loan or meet contractual obligations. It can affect lenders, investors, businesses, and individuals who rely on credit transactions. Therefore, it is important to identify and mitigate credit risk to avoid financial losses, legal disputes, and reputational damage. In this article, we will discuss some methods and tools to help you assess and manage credit risk effectively.
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- Afolabi Hassan Lending I Collections I Risk I Recovery I Microfinance I Financial Inclusion
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- Wame Mogotsi Head of Impairments and Portfolio Management at Stanbic Bank Botswana
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- Vuyelwa Morapetsane, EMBA Credit Manager
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1 Credit scoring
One of the most common ways to identify credit risk is to use credit scoring, which is a numerical representation of a borrower's creditworthiness based on various factors, such as payment history, debt level, income, and credit mix. Credit scoring can help lenders and investors to evaluate the probability of default and the expected loss of a potential borrower. Credit scoring can also help borrowers to improve their credit profile and access better terms and rates. However, credit scoring is not flawless and may not capture all the relevant information or changes in the borrower's situation. Therefore, it is advisable to complement credit scoring with other methods and sources of data.
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- Afolabi Hassan Lending I Collections I Risk I Recovery I Microfinance I Financial Inclusion
Both pre - disbursem*nt and post - disbursem*nt loan monitoring are key to credit risk identification and mitigation. Other risks ignored by the credit officer during assessment might be discovered during pre - disbursem*nt monitoring. Also, during post - disbursem*nt monitoring, risk that could affect prompt and full repayment would be seen and the situation can be arrested as soon as possible.
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- Wame Mogotsi Head of Impairments and Portfolio Management at Stanbic Bank Botswana
Before implementing credit risk mitigation strategies, organizations should consider critical aspects that significantly impact their approach. These include:Adopting portfolio risk monitoring of your customers Monitoring portfolio risk is pivotal for an organization’s success and risk mitigation. This approach involves identifying, assessing, measuring, and managing risks within the customer portfolio, ensuring enhanced business value delivery and risk mitigation.
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See AlsoFundamentals of Credit Analysis5 Cs of CreditFormative and Summative Assessment | Center for Innovative Teaching and Learning | Northern Illinois UniversityWhat is Credit Risk Strategy? - FasterCapitalCelebrate
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- Vuyelwa Morapetsane, EMBA Credit Manager
I will firstly define Credit risk - this is the possibility of loss due to a borrower defaulting.The way to identify this risk is by ensuring the 5 C's of credit are used to identify the level of risk associated with providing the borrower with funds. These are Character, Capacity, Capital, Collateral and Conditions.The 5C's also include mitigants under Collateral and Conditions.
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- OLUSEGUN Afolayan Risk Management-Credit Risk|Finance|Business Advisory|Analytics|Technology
Credit scoring has, over the years, offered a more precise assessment of borrowers' eligibility for credit products, potential repayment ability, and default estimates. However, its reliability is heavily contingent on the accuracy and source of the data. A more comprehensive dataset from a reliable credit source enhances the credibility of the credit model and scores.
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- LOLU Olatunji Credit Risk Manager @ STERLING Bank Plc
Creditrisk identification can be observed from a couple of sources. 1. Financial ratio analysis can show us some of the imminent red flags in a particular transaction. 2. Analysis of the CRMS from the CBN and at least 2 other bureau showcasing history of past credits from all the Financial Institutions also can be of help. 3. Micro and macro economic analysis and industry trends can expose our eyes to the impending dooms.4. The character of the customer and discipline is also to be noted. A socialite who is visiting night clubs and parties frequently in the company of women of easy virtues may not repay loans as and when due.5. A client who's making attempts at rubbing your palms with money before loans are booked should be avoided.
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2 Credit analysis
Another way to identify credit risk is to perform credit analysis, which is a systematic and comprehensive examination of a borrower's financial situation, business performance, industry outlook, and external factors that may affect their ability to repay. Credit analysis can help lenders and investors to understand the borrower's strengths and weaknesses, identify the key risks and opportunities, and determine the appropriate credit terms and conditions. Credit analysis can also help borrowers to demonstrate their creditworthiness and negotiate better deals. However, credit analysis can be time-consuming and costly, and may require specialized skills and tools.
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- Joan M Jiménez C Gerente Corporativo de Crédito y Cobranza
Como bien se indica en este apartado, el examen al prestatario es fundamental para definir el riesgo del crédito, pero no solo revisándo los aspectos cuantitativos sino también los cualitativos que enmarcan la situación de éste. De estos últimos, y tratándose de compañías, especialmente las pequeñas y medianas, es fundamental la revisión de la posición de su Gerencia: Quiénes la conforman?, Desde hace cuánto tiempo?, Cuál es el estilo de liderazgo y de hacer negocios? A qué generación corresponden (en empresas familiares)? Cuál es la visión sobre su negocio para los próximos cinco años?, entre otros puntos relevantes, darán idea de en manos de quién está el préstamo. Finalmente son estos los que obligan legalmente a sus representadas.
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- OLUSEGUN Afolayan Risk Management-Credit Risk|Finance|Business Advisory|Analytics|Technology
Credit analysis serves as a vital metric in risk management, crucial for borrower profiling, assessing credit product suitability, and determining the viability of credit requests for lenders. A thorough credit analysis integrates historical technical and fundamental data about individuals or firms, meticulously reviewed to project probabilities of borrower default or otherwise. The evolving landscape of micro and macro variables adds complexity to credit risk analysis. However, techniques like reverse-underwriting and stress testing have proven to be more efficient in conducting comprehensive credit analysis.
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3 Credit monitoring
Once the credit risk is identified, it is essential to monitor it regularly and proactively to detect any signs of deterioration or improvement in the borrower's situation. Credit monitoring can help lenders and investors to track the borrower's performance, compliance, and behavior, and to take timely actions to prevent or mitigate losses. Credit monitoring can also help borrowers to maintain a good credit reputation and avoid penalties or defaults. However, credit monitoring can be challenging and complex, and may require effective communication and collaboration between the parties involved.
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- OLUSEGUN Afolayan Risk Management-Credit Risk|Finance|Business Advisory|Analytics|Technology
One thing I've realized over the years is that active monitoring is at the core of credit risk management and often necessitates a distinct strategy. This strategy must be comprehensive and inclusive, with everyone in the firm having clearly defined monitoring roles.Without proper credit monitoring, even the best-packaged and analyzed credits can underperform, and vice versa.
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4 Credit mitigation
It is essential to mitigate credit risk by reducing exposure or the impact of a potential default. Credit mitigation can protect lenders and investors, as well as help borrowers lower their credit costs and increase their credit availability. Common credit mitigation techniques include collateral, guarantees, insurance, hedging, and diversification. Collateral is an asset pledged as security for the loan, while guarantees are promises by a third party to pay the debt if the borrower defaults. Insurance is a contract that transfers the credit risk from the lender or investor to an insurance company. Hedging is a strategy that uses financial instruments to offset the credit risk, and diversification is a strategy that reduces the credit risk by spreading the exposure across different borrowers, sectors, regions, or products.
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- OLUSEGUN Afolayan Risk Management-Credit Risk|Finance|Business Advisory|Analytics|Technology
The credit policy often includes applicable credit mitigation strategies, and these can vary among lenders. The primary goal, however, is to safeguard the lender's assets from the risk of default.As a credit risk analyst, I consistently take credit mitigation provisions into account in my credit analysis, contributing to well-informed and concrete credit decisions.
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5 Credit risk management
Credit risk management is the process of identifying, measuring, monitoring, mitigating, and reporting credit risk in a consistent and effective manner. Credit risk management can help lenders, investors, businesses, and individuals to optimize their credit decisions, enhance their credit performance, and comply with their regulatory and ethical obligations. Credit risk management can also help to improve the overall financial stability and resilience of the credit system. To implement a sound credit risk management system, it is necessary to have a clear credit policy, a robust credit infrastructure, a qualified credit staff, and a continuous credit improvement.
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- OLUSEGUN Afolayan Risk Management-Credit Risk|Finance|Business Advisory|Analytics|Technology
Credit risk management encompasses policies, processes, and personnel employed by lenders to achieve several key objectives:1. Enhance the selection of high-quality borrowers.2. Initiate and successfully navigate credit cycles.3. Control and manage the risks associated with default in lending activities.4. Proactively address non-performing credits or outlier transactions, such as the remediation of toxic or problematic credits.5. Effectively price the risks associated with each credit, aligning with risk pricing objectives.Achieving these objectives is integral to ensuring the short, medium, and long-term survival of the lender, ultimately maximizing shareholder value.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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