Before explaining what credit risk management is, the definition of credit and credit risk will be expounded to help the readers understand thoroughly about the research topic.
Credit is defined as a transaction of money and non-monetary items between lenders and borrowers in which the borrowers are obliged to return it in the future. However, credit normally requires the payment of interest as a cost of capital or opportunity cost to compensate for the usage of the lenders’ resources (Joseph, 2013). As regards to credit risk, it is the risk when the debtors fail to meet the financial obligation in terms of reluctance, incapability, or tardiness (Bouteille & Coogan-Pushner, 2012). Hence, what does it mean credit risk management? It would be stated as managerial actions
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(Joseph, 2013) 3. Importance of CRM
Credit risk management is essential for every financial institution to ensure its safety and soundness or avoid bankruptcy, in other words. For example, the recent financial crisis in 2007 truly saw the collapse of huge amount of businesses over the world. On the contrary, firms which have good CRM policies can rescue themselves from significant impacts of the crisis. The meanings of managing credit risk are mainly related to three aspects: survival, profitability, and return on equity.
a) Survival
This first significance of CRM can be seen as the most relevant concern of financial institutions such as commercial banks like Viettinbank. However, it does not mean that non-financial institutions will not consider credit risk as one of the matters to their survival. If those kinds of firms suffer a huge amount of losses, it is possible for them to go bankrupt.
b)
First I will explain what credit is. Next explain one efficient way to build credit. Finally, will touch upon the importance of an excellent credit Now let us begin with what is credit. Credit is what a lender uses to determine how well a person pays back the borrowed money. Credit is general viewed at 740 to 900 are excellent, 680 to 739 are very good, and 640 to 679 are fair and below 639 are poor.
In today's volatile environment, companies have to be prepared to manage their portfolio risk in order to remain sustainable and viable in today''s economy. Risk are inherent and can arise at any moment. To avoid or limit risk, a company has to have an effective Enterprise Risk Management (ERM) team or plan in effect, lead by an effective Chief Risk Officer (CRO), such a myself. As CRO, my overall purpose is to provide leadership and direction for an effective enterprise risk management framework of risk for the organization, so that the company can increase customer churn and revenues.
Obviously, financial establishments can endure breathtaking misfortunes notwithstanding when their risk management is top notch. They are, all things considered, in the matter of going out on a limb. At the point when risk management fails, be that as it may, it is in one of the many fundamental ways, almost every one of them exemplified in the present emergency. In some cases, the issue lies with the information or measures that risk directors depend on. At times it identifies with how they recognize and impart the risks an organization is presented to. Financial risk management is difficult to get right in the best of times.
The implications of these findings are as follows. The works of these academics highlight the important point that there is higher volatility of capital charges for better quality credits (Goodhart & Taylor, 2004). This is because these credits face a steeper risk curve, as the movement within the ratings scale (from one rating to another) is much greater.
Kuiper, J. (2011, May 18). What Is Currency Risk? About.com. Retrieved February 14, 2014 from http://internationalinvest.about.com/od/foreigncurrencies/what-is-currency-risk.htm
What does Credit Score means? Credit score is the way different credit entities rate how responsible is the person at the moment of spending or paying bills. In the United States, the credit is simply one of the most powerful keys to get things we all want or need for our lives. To make a point, I am going to ask you to picture the house of your dreams. Then think how are you going to pay for it? The answer is, unless you are lucky enough to hit the lottery, the only other way is financing it, but not everyone has an A1 credit. Therefore, to achieve that goal we are going to need to build a lot of credit credibility also known as credit score. The most important facts explained in the presentation where: How does it work? How to build it? And last but not least what hurts our personal score? These important facts are the most fundamental things when we start to talk about credit.
Risk is the basic element that drives financial behaviors and without risk the financial system would be massively simplified, but this risk is already present in the real world Financial Institutions. Consequently, should manage the risk effectively to survive in this highly uncertain environment of banking which will undoubtedly rest on risk management dynamics. Hence only those banks that have efficient risk management system will survive in the market in the long term.
No firm can be a success without some form of risk management. Risk are the uncertainty in investments requiring an assessment. Risk assessment is a structured and systematic procedure, which is dependent upon the correct identification of hazards and an appropriate assessment of risks arising from them, with a view to making inter-risk comparisons for purposes of their control and avoidance (Nikolić and Ružić-Dimitrijevi, 2009). ERM is a practice that firms implement to manage risks and provide opportunities. ERM is a framework of identifying, evaluating, responding, and monitoring risks that hinder a firm’s objectives. The following paper is a comparison and evaluation to recommended practices for risk manage using article “Risk Leverage
Interest rate risk is the potential loss due to interest rates movements. It arises because the assets of the bank usually have a significantly longer maturity than its liabilities. Interest rate risk management is also called asset-liability management (or ALM).
In order to bring a difference in the short-term finances and the long term viability of any business there has to be an effective credit management so that it helps to minimize the slow payments made by the customers. It is found that there is more to credit management than just collecting cash. Mostly, nowadays credit managers find themselves to be aligned just as similar to the marketing function as to finance. There are many positive aspects of having a credit insurance policy. These can be: customer relationship management, supplier relationships and banking as well as financing relationships.
Access to capital and credit at various stages in the business life cycle is identified as the major hurdle by the entrepreneurs. For many small firms and most start-ups, the personal funds of the business owners and entrepreneur and those of relatives and acquaintances constitute as the major source of capital. For many small businesses, especially during the early years of their operation, credit is simply not available. For many others, the limited available credit is not through bank loans. Due to this many of them rely on multiple credit card balances and home equity loans as major sources of credit for start-up firm. Because banks are bound by laws and regulations to prudent lending standards that require them a risk management assessment for each loan made. These regulations were made more vigor during the late 1980'' and early 1990 . Banks always found that lending to manufacturing firm with hard asset such as property, equipment, and inventory has always been easier than lending to today's expanding service sector firms. Because the service sector firms own few hard asses, therefor lending judgment have to be based in terms of character, markets, and cashflow, which make it difficult to the bank to meet the regulations for the approval of the loan. Additional, the banking industry, as well as the entire financial sector of the
Most critical to this discussion is a clear understanding of what a financial manager is and does and how his or her role aids in helping to establish the valuation of a corporate entity in today's global financial market. Quite simply, a financial manager helps to measure a company's market value and its risk while also helping to systematically reduce its costs and the time necessary to make informed decisions regarding objective driven operations. This is quite a demanding game plan for an individual and most often financial managers, in the corporate world, work in cooperation with a team of financial experts. Each member of that team perhaps having expertise in differing areas of activity, but each however, being no less expert in his or her respective area of endeavors in behalf of the corporation. The team is assembled under the direction of the officer know in the corporation as the Chief Financial Officer who today is becoming increasingly indispensable to the CEO who directs a modern model of action driven, bottom-line oriented corporate activity (Couto, Neilson, 2004). One can accurately state that the role of the competent and capable financial manager is figuratively worth its weight in gold.
Over the past decade, risk and uncertainty have increasingly become major issues which impact business activities. Many organizations are raising awareness to minimize the adverse consequences by implementing the process of Risk Management Framework which plays a significant role in mitigating almost all categories of risks. According to Ward (2005), the objective of risk management is to enhance a company’s performance. In particular, the importance of the framework is to assist top management in developing a sensible risk management strategy and program.
All the more particularly, this decides the ability to absorb misfortunes, fund its extension, pay profits to its shareholders, and develop an adequate level of capital. Being front line of defense against the destruction of a capital base from misfortunes, the requirement for high profit and earnings can scarcely be overemphasized. Although diversifying pointers are utilized to fill the need, the best and most broadly utilize indicator is a Return on Assets (ROA). ROA is employed by establishments and banks to outfit them with an important instrument for evaluating their progress, including utilization of assets and financial quality (Haque, 2014). Then again, for inside and out examination, an alternate pointer Net Interest Margins (NIM) are likewise utilized. Chronically unfruitful money related establishment’s hazard bankruptcy. Contrasted and most different pointers, inclines in gains can be hard to decipher for cars, abnormally high benefit can reflect excessive danger
With a changing economy external factors have placed an undeniable importance for businesses to implement an Enterprise Risk Management (ERM) program within their organization. The need for ERM is present in almost any business sector, including higher education. An effective ERM program successfully identifies risk that are present internally and externally in regards to the organization. Identification of key risk, prioritizing the risk and implementing strategies will aid in avoiding and mitigating the risk that could have catastrophic implications. Ultimately, a strong ERM program will allow the organization to manage risk successfully by instilling an ongoing process.