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Over the years we have come across several examples of credit risk management failures within the financial institutions as well in other industries which offer credit to entities either in the form of borrowing funds or receiving services and products with the promise to pay back in a certain period of time, and who fail to meet their obligations in accordance with the agreed terms.
Therefore, in today’s complex markets, Credit information is essential to a vast number of industries, from Financial sector to Wholesales, Insurance, Telecom and anyone dealing with funds and transactions. Businesses tend to search for information which will help them compete successfully and achieve profitability targets within their industry. The amount of accurate data which they will gather and analyse will became vital when assessing their risk and structuring their strategy whether it is related with customers/suppliers’ risk, compliance or for business development. By having said that, the need for credit information may arise through multiple reasons, and this is usually directly related with the lack of credit standards for the entities who receive a service or product, poor portfolio risk management, or minimum attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing.
On the other hand, offering credit is also part of the business and in many cases expected in order to agree to a cooperation. Therefore, its essential to trace data and analyse the environment before deciding and agree to the terms of the payment as to minimize the risk as much as possible.
For a better understanding, Credit risk is most simply defined as the potential that someone fails to meet its obligations in accordance with agreed terms and therefore it continues to be the leading source of problems in a variety of industries. It is crucial to develop awareness, identify, measure, monitor and control credit risk as well as to determine that businesses hold adequate capital against these risks and that they are adequately compensated for risks incurred. For that reason, it’s essential to develop Credit risk management activities and by that we refer to the processes used to assess, mitigate, and monitor potential risks which are associated with lending money or extending credit to an entity. It is a fundamental and critical aspect of any industry dealing with funds and transactions for their operational process and involves various strategies and practices which will focus on minimizing the likelihood of not receiving the payment by an entity.
There are various key components of the credit risk management, and a common step is the Credit Risk Assessment. By assessment we mean evaluating the creditworthiness of the recipient before defining its credit and for how long. This includes a review of the entity’s current financials, credit history, collateral and other associated aspects which will support in determine the ability of making the payment. Once the creditworthiness of the entity has been assessed, risk mitigation should be evaluated in order to minimize the possibility of any losses.
Meanwhile its beneficial to look for other relevant and important information through a credit risk service provider who will offer a report with all the available data in record. This will allow a better understanding of the entity that someone will potentially do business with and offer credit.
The access to information one will have will be related with the company’s structure, ownership, legal entity type, industry, size, and geographic location. Along with its activities and commercial information, including import and export activities and payment information. Furthermore, access to the entity’s financial statements means that a business will be able to make a detailed analysis of their financial standing and in turn make more informed business decisions. In some cases, the reports will include risk rating based on a variety of qualitative as well quantitative factors which will allow the overview of the creditworthiness, financial condition, performance, and stability. A report which includes a credit scoring model will provide rating based on various factors such as credit history, income, payment behaviour, offering an understanding of the level of the provider’s risk.
With no doubt a credit risk report can be described as a valuable tool for taking credit decisions, managing credit portfolios and monitoring ongoing credit risk exposures. The insights of such report may form decisions and acts since it can support in making a comprehensive evaluation on the entity’s creditworthiness and select whether to extend, maintain a credit relationship. It enables lenders, investors as well borrowers to be well informed before proceeding to any credit limit settlement.
In the event that a credit limit is offered, ongoing monitoring should be considered as a form of early warning sign in the potential of failure in meeting the terms. By monitoring key risk indicators, financial ratios, market trends, and overall keep the information running a business will be prepared on any potential liquidity issues and change in overall behaviour.
An early detection will allow controlling the situation, negotiation, implement risk strategies, initiate recovery measures, and minimize losses. Risks do not always appear at the start of a business connection but can become apparent only over time. This is a particular crucial point especially for international business activities.
Overall, a credit risk management aims to strike a balance between the profitability and the risk exposure by identifying and mitigating potential credit losses. Undeniably it supports financial institutions, Wholesales, Insurance companies and other industries to form their credit offering and terms, providing them an understanding of the entity they deal with therefore to take actions which will allow them to protect their capital and maintain their financial stability.
Offering credit could be beneficiary to lock a business activity and while great relations and assurances are positive signs of business development, a credit assessment is better in terms of knowing your client and their capabilities, thus ensuring productivity and profits resulting to the smooth operation of the business.
Infocredit Group is a leading provider of commercial and credit information offering access to high-quality data in more than 200 countries. Contact us for more information at (+357) 22 398 000.
Anna Tomouzou,
International Sales Officer, Infocredit Group