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Credit risk managementThere are many consumers struggling to pay off their credits. The lenders have started to notice that the bad debts are prompting them to take a number of measures to deal with the situation. The lenders are feeling increased pressure on their business as bad debts are creeping up and the borrowers are having difficulties to meet the repayments. Since the consumers are defaulting on their repayments the lenders have to increase their provisions for bad and doubtful debts.
The lenders are adopting a more stringent lending policy by raising the cut-off points in their credit score models. The credit card providers are focusing less on mass-acquisition promotional offers. The lenders are encouraging the consumers to consolidate the credit card balances into personal loans. The reason is the unstructured debt can be converted into structured debt. So the credit management can give rise to various kinds of financial risk.
What is Credit Risk Management?
The credit management or the debt management by nature gives rise to various forms of financial risks. The organisation which under takes the debt management plan of a consumer is exposed to various risks like market risk, liquidity risk, counter-party risk , credit and operational risk. The credit management organisation applies a number of risk management tools to quantify and manage the different types of risk. These tools include systems to quantify the sensitivity of budgeted debt service costs, both in the current year and in future years, to movements in exchange rates and interest rates.
Principles Of Credit Risk Management
1. When a consumer borrower fails to meet the obligation in accordance with agreed terms, it is the credit risk to the lender. The lender can be a financial institutions like a bank. The goal of the credit management is to maximise a bank\'s risk-adjusted rate of return by maintaining risk exposure within acceptable parameters. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation.
2. The largest risks faced by the banks are the loans. However, there are other risks like inter-bank transactions, trade financing, foreign exchange transactions, extension of commitments and guarantees and the settlement of transactions. To manage the credit risk the banks should have a keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and they are adequately compensated for risks incurred.
3. The credit risk is related to the process of settling financial transactions. The level of the risk is determined by the particular arrangements for settlement . The factors that have impact on the credit risk include the payment /settlement finality, the exchange value and the role of intermediaries. The credit risk management services provide substantial benefits to the companies and banks cash flow and profitability. The services give insight to credit exposures, loss trends. They provide suggestions to make better strategic decisions. The credit risk management organisations helps to maximize customer relationships by understanding and optimizing risk tolerances. The credit risk management organisations provide frameworks to actively manage customer portfolio and identify appropriate strategies for risk mitigation.
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