The best way to manage a crisis is to prevent one. Credit risk management thus becomes a critical component to the profitable and smooth running of financial services organizations. Any bank or lender with strong risk management DNA does more than just mitigate risk, it provides a pervasive competitive advantage in competitive and often over-saturated markets by lowering risk while increasing addressable customer base. Credit risk management techniques become a key component of an organization’s risk strategy and implementing it well, results in immediate and tangible rewards.

Challenges to successful credit risk management

Credit risk management looks at a borrowing party’s creditworthiness. Lenders will look at previous credit history and repayment behaviors as well as the current debt profile and ability to pay to determine whether to give a borrower a new loan. This means doing a deep dive into the requesting company’s corporate information as necessary as well as looking as well as tenure of the loan and the amount under consideration. The key is to balance risk with opportunity. The better the balance the more loans a lender can give out successfully. The challenges that need to be overcome for successful credit risk management are numerous:

Poor master data management: Lenders often do not have a single source of truth on their own corporate customers. Acquisitions, diversifications, opportunistic product launches, departmental silos and heterogeneous technology environments have all combined to fragment customer data. It is entirely possible for one customer to have several different profiles and varying credit histories while dealing with the same banking group.

Rigid risk models: Risk analysts work within rigid parameters of existing risk models. This not only means duplication of effort but also allowing an opportunity to slip through their fingers. Just the potential of global SMB lending that is untapped is in trillions of dollars.

Integrity of credit reporting: Financial services organizations rely on an ecosystem of actors for optimal risk assessment. A key party is the credit risk agency whose reports are used as support in trade finance or lending decisions. It is important to choose these ecosystem partners based on the quality of their data, their methodology. They should be able to combine the most comprehensive measures of risk to deliver a highly reliable rating analyzing the current and future health of a business. Their analytics should be able to recommend a credit limit to help with faster processing of requests.

Laborious reporting: Manual and/or spreadsheet-based reporting can overwhelm risk analysts and their technology peers. Credit risk management tools with data visualization and analytics that can do everything from looking at corporate macro risk profiles to credit card risk management need to be smartly implemented within a heterogeneous technology environment.

Best practices in credit risk management

When you study financial institutions that outperform peers on credit risk management some common themes emerge.

Know your customer (KYC): Get the best, latest deduplicated financial information not only about your customer but about his industry and quality of management. This gives you better a perspective on growth opportunities ensuring you do not miss out.

Treat credit risk as a lifecycle: Credit risk needs to stop being treated as a decision. Processes, technology investments and organizational structure should be built around treating credit risk as a cycle. Guideline for risk should be updated and reflecting strategy. Risk models should be developed, tested and deployed with agility and then monitored. Data from the monitoring should be used to improve the model. Risk changes but often risk assessments do not. Financial institutions need to also monitor the risk of existing clients as a matter of governance.

Agile data-driven decision making: It is important that data is presented visually, and intelligently so quick but better decisions can be made. This requires a combination of business intelligence and data visualization.

Best solution in credit risk management

With disruptive technology and changing customer journeys, the challenges in credit risk management are evolving. This is why the best solution has at its heart qualified validated data that is up to date. Whether you are a bank lending to companies or consumers gaining a better understand of risk holistically and then functionally is key to better risk management. Risk is not the job of a department. It is an enterprise-wide strategy viewing risk at individual, customer and portfolio levels but also with filters for hidden management and business strengths and weaknesses, industry competitiveness, moats and outlook. Invested in integrated data solutions that manage that is also wise as is selecting partners in the ecosystem with expertise in business data intelligence and validation.