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.
Credit risk is an aspect where the bank borrower may fail to fulfill its obligations in regards to the underline terms. In most banks loans are the most and largest sources of risks. Therefore banks have to draw some measures to reduce the coverage of credit risks. Banks ought to have great awareness in need to control, identify, measure and monitor credit risk and also make sure that they have enough capital in relations to these risks and they sufficiently cater for the risk incurred.
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.
In this chapter, it talks about credit risk analysis and interpretation, the company it focuses on is Home Depot and to how to have asset: borrow, gift, or earn. The way Home Depot manages their company is by borrowing money from their operating and nonoperating creditors. On their 2011 balance sheet it shows that some of the money that was borrowed came from their operating liabilities, was is $4,717 million and the other money borrowed came from nonoperating liabilities which are long-term debt. Several companies borrow from banks to, but Home Depot doesn’t, because their debt is publicly traded. Because Home Depot borrows its money from leasing companies and sellers which offer financing, the creditors should evaluate Home Depot’s credit
Asset liability management is defined as “the process of decision making to control risks of existence, stability and growth of a system through the dynamic balances of its assets and liabilities”. ALM (asset liability management) is the process in which the asset and liabilities by matched by managing the maturities and the interest rate sensitivity in the process of the organization to minimize the IRR (interest rate risk) and liquidity risk. ALM (asset liability management) can be seen as a tool of risk management which is designed to earn an acceptable return whilst maintaining a surplus of assets which are comfortably more than the liabilities. ALM (asset liability management) is an integral part of any financial institution. In a banking system various risks are involved such as risks associated with interest rate on lending and short-term and long-term borrowing, exchange rate risks and finally the liquidity position of the bank, these risks are the most important part of ALM (asset liability management) but credit risk and contingency risk also part of ALM (asset liability management). The asset liability matching by banks is done by grouping various assets and liabilities by their maturity period
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.
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.
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.
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
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