What Is Credit Risk Management?
Credit activity is always one of the core activities of banks. For banks and financial institutions, corporate customers are always the main subjects that they aim to grant credit.
The amount of credit granted to corporate customers always accounts for the largest proportion and is also the riskiest. This is not only an activity that generates a major source of revenue for banks but also a potentially risky activity.
1. Definition of credit risk management
To understand what credit risk management is, we must first study the concept of credit risk.
Credit risk is the risk arising due to the borrower’s failure to strictly comply with the terms of the credit contract. This might happen when the customer is late in debt repayment, not fully pays the debt amount or fails to pay debt when principal and interest amounts are due, causing financial losses and difficulties in the business activities of commercial banks.
In the context of today’s competition and integration, one of the essential factors contributing to the existence and development of a commercial bank is its ability to manage risks, especially credit risks, in a comprehensive and systematic manner.
Credit risk management is understood as the process of identifying and analyzing risk factors, measuring the level of risk, thereby selecting measures to manage credit activities to limit and eliminate risks in the credit process.
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2. Credit risk management practices and techniques
Practices and techniques applied by banks in the process of credit risk management are as follows:
- Planning credit strategy, building credit processes and policies: Credit strategy is the development plan in a defined time period of a bank. The operational strategy reflects the bank’s willingness to take risks. Through the credit strategy, credit process policies are in place to ensure that credit operations achieve positive results as set out in the plan.
- Credit analysis: This is the most basic content of credit risk management. Credit analysis is the collection and processing of information, and consideration and assessment of factors affecting a client’s ability to pay loans as a basis for making appropriate lending decisions.
- Scattering credit risks: This activity includes performing well the process of classifying and setting up credit risk provisions as well as regulations on prudential ratios in credit activities, establishing internal scoring and ranking customers system on the basis of regular monitoring of customer performance with early warning indicators including financial analysis indicators and related information.
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