Enterprise Solutions

Reducing Bad Loans with Collaborative Credit Risk Management

In this POV paper, we highlight the need for banks to have their own credit risk assessment and how regulatory or financial bodies can come together to provide a collaborative credit risk management service to banking institutions with no data or analytical models.

 

For banks, an important source of revenue is the interest obtained from long-term loans to borrowers. However, non-repayment of these loans can deal a severe blow to the bank's profitability posing a certain credit risk. Large banks can use sophisticated management information systems to monitor and contain credit risk, whereas smaller institutions rely more on their in-house experience to guide loan decisions. Another way to address the problem is to jointly contribute central and other banks resources to set up and use a 'centralized' credit risk management system.

A comprehensive credit risk management system will typically cover risk rating that covers projections and other economic factors, including industrial and management risks that may influence the current and future financial condition of borrowers; and a credit portfolio management that concentrates on diversifying the credit portfolio in order to lower the risk of non-repayment of loans with respect to an entire industry.

Banks that are challenged by limited resources and cost pressures will find it difficult to build an information management framework that incorporates the vast amount of data and financial models that are needed for credit risk management. Therefore, it is recommended that a country's central bank must take concrete steps in developing a shared, collaborative credit risk management service.

It is important that central banks and other financial bodies of national importance take the lead in promoting collaborative credit risk management to alleviate the burden of mounting bad loans. To begin with, they can work with stakeholders to share their expertise in the area followed by running a pilot scheme and wider deployment later on. This collaborative approach can be instrumental in addressing and improving the financial stability of institutions and even economies globally.

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