What’s Credit Risk?
Credit risk refers to the probability of loss due to a borrower’s failure to pay off a debt. Credit risk is something all financing institutions must calculate in order to make decisions on loan applications. Managing credit risk means mitigating losses and increasing profits by understanding loan loss reserves. Credit risk management has been challenging for financing institutions due to unreliable data, but with the rise of modern algorithms to aid credit risk management processes, scoring has improved.
How do you assess Credit Risk?
Credit risk is traditionally calculated based on the borrower’s overall ability to repay. For consumer loans, financing institutions look at credit history, reply capacity, capital, and specific loan conditions. Most lenders have an entire department dedicated to making credit risk decisions for each individual applicant.
Credit Risk Management Challenges
The greatest challenges to credit risk management processes are inefficient data management, a lack of broad risk modeling frameworks, and manual processes. Due to inefficient data management, relevant data can be difficult to access and cause delays or decrease profits. A lack of optimized risk modeling frameworks means that lenders can’t get a picture of groupwide risk. And finally, due to processes being partly or fully manual, decisions take too much time and can be affected by human error.
Best Practice Credit Risk Management
If lenders want to reduce loan losses and increase profits, they have to optimize their credit risk management. The key to this is implementing a modern, integrated, quantitative credit risk solution. The ideal solution is easy to implement, and improves end-user experiences while offering the following:
- Real-time credit scoring
- Improved model management
- Modern data visualization capabilities
- Easy integration with other business intelligence tools