credit risk management

Credit Risk Management

Credit risk refers to the probability of loss due to a borrower’s failure to make payments on any type of debt. Credit risk management, meanwhile, is the practice of mitigating those losses by understanding the adequacy of both a bank’s capital and loan loss reserves at any given time – a process that has long been a challenge for financial institutions. Let us look at the duties of a Credit Risk Manager

Risk managers advise organisations on any potential risks to the profitability or existence of the company. They identify and assess threats, put plans in place for if things go wrong and decide how to avoid, reduce or transfer risks.

Risk managers are responsible for managing the risk to the organisation, its employees, customers, reputation, assets and interests of stakeholders.

They may work in a variety of sectors and may specialise in a number of areas including:

• enterprise risk;
• corporate governance;
• regulatory and operational risk;
• business continuity;
• information and security risk;
• technology risk;
• market and credit risk.

Herewith the list of duties of a Credit Risk Manager:

• To establish and monitor policies and procedures that will help the company meet its sales and risk management goals.
• Monitoring and evaluating active accounts to reduce or prevent bad debt losses.
• Keep policies and procedures current, and communicate them to your subordinates and to other affected parties.
• To listen to input from sales and sales management and then look for ways to help the sales department achieve its goals without damaging your department’s ability to manage risk and control payment delinquency to acceptable levels.
• Control the costs to operate the credit and collection functions
• Convincing senior management when opportunities present themselves to invest in technology that can help the credit department cut costs, accelerate the decision making process, and/or improve the quality and consistency of credit decisions being made
• Review strategic credit positions
• Assess Changes in Largest Exposures
• Assess Counterparty Ratings
• Review if  there are any pending credits to be cleared by the chief credit officer or board
• Review if there are any credit limit excesses
• Review Credit Limits
• Assess if provisions are up to date
• Review if concentrations are within stipulated limits
• Assess if all credit exposures are covered and mapped
• Check for wrong way positions
• Report all significant risks
• Ensure credit risk reports reach all relevant parties
• Discuss significant credit risks if any with top management
• Conduct stress and scenario testing and analysis of portfolio at global levels
• Ensure no relevant scenarios are missed in testing
• Review past or anticipated changes in provisions
• Review if any changes need to be made in specific provisions
• Ensure all transactions have full and proper documentation
• Review rating triggers and break clauses
• Ensure credit protection is fully understood and utilized
• Explore if there are any further possibilities of exploiting credit protection
• Establishing and communicating department goals and performance results to subordinates
• To staff the department, train its employees and delegate work to meet senior management’s expectations and the market’s requirements
• To actively support employee growth through training, performance reviews, mentoring and coaching
• To meet corporate standards relating to managing subordinates, avoiding conflicts of interest, communicating with customers, and interacting with peers and superiors.
• To praise subordinates in public, and reprimand them in private.
• planning, designing and implementing an overall risk management process for the organisation;
• risk assessment, which involves analysing risks as well as identifying, describing and estimating the risks affecting the business;
• risk evaluation, which involves comparing estimated risks with criteria established by the organisation such as costs, legal requirements and environmental factors, and evaluating the organisation’s previous handling of risks;
• establishing and quantifying the organisation’s ‘risk appetite’, i.e. the level of risk they are prepared to accept;
• risk reporting in an appropriate way for different audiences, for example, to the board of directors so they understand the most significant risks, to business heads to ensure they are aware of risks relevant to their parts of the business and to individuals to understand their accountability for individual risks;
• corporate governance involving external risk reporting to stakeholders;
• carrying out processes such as purchasing insurance, implementing health and safety measures and making business continuity plans to limit risks and prepare for if things go wrong;
• conducting audits of policy and compliance to standards, including liaison with internal and external auditors;
• providing support, education and training to staff to build risk awareness within the organisation.

Some of the skills of an effective Credit Risk Manager:

• technical acumen;
• problem-solving and decision-making abilities;
• analytical skills and a good eye for detail;
• ability to cope under pressure;
• planning and organisation skills;
• negotiation skills and the ability to influence people;
• good communication and presentation skills;
• commercial awareness;
• numerical skills and the ability to evaluate costs;
• ability to understand broad business issues.

Challenges to Successful Credit Risk Management:

• Inefficient data management. An inability to access the right data when it’s needed causes problematic delays.
• No groupwide risk modeling framework. Without it, banks can’t generate complex, meaningful risk measures and get a big picture of groupwide risk.
• Constant rework. Analysts can’t change model parameters easily, which results in too much duplication of effort and negatively affects a bank’s efficiency ratio.
• Insufficient risk tools. Without a robust risk solution, banks can’t identify portfolio concentrations or re-grade portfolios often enough to effectively manage risk.
• Cumbersome reporting. Manual, spreadsheet-based reporting processes overburden analysts and IT.
• Unclear duties of a Credit Risk Manager. When a Manager is unsure of what is expected of him or her, especially on entering a new business industry.