Are you using the most up to date credit risk management strategy?
Todays high rate of delinquency and default has forced lenders to examine their business practices to determine the best path toward future profitability. Lenders continuing to follow a failed credit risk management strategy will unfortunately continue repeating the same expensive mistakes.
Short-Term Fixes Can Cause Long-Term Problems
Lenders must make changes to their credit risk management strategy that balances both current and future needs within the credit landscape. Simply plugging leaks in a credit portfolio could damage the financial foundation of a lender, which will ultimately weaken the lenders position in the credit market.
For instance, say a credit card company raises interest rates for each cardholder in response to losses from those who defaulted. Although this may bring in some money for the short-term, it could lead to disaster in the long-term as customers who have good credit will typically respond by opening accounts with other credit card providers, choosing to close the expensive account. Cardholders with poor credit may complain about the increased interest rate, but their credit situation will keep them from getting a credit card from another provider. This results in an unbalanced lending portfolio with a larger ratio of high-risk borrowers.
Developing A Credit Risk Management Strategy
Todays lenders can benefit from new loan generation software that provides sophisticated tools to minimize risk. Having the ability to categorize and analyze a loan portfolio can help a lender create a profitable credit risk management strategy. By developing a comprehensive risk management plan, lenders protect themselves without affecting their best customers.
Lenders should evaluate a borrowers creditworthiness based on recent data. While the FICO score is still valuable, its based on outdated information and old data because a borrowers financial situation may have significantly changed since receiving the FICO score. Lenders must consider payment history and recent charging habits as a noticeable change in the habits of a borrower might signal looming problems. This doesnt mean a lender should close a borrowers account that exhibits signs of potential future issues. Lenders should just think twice before making a credit limit increase approval.
Evaluate Strategies Regularly
As recent events in the financial sector emphasize, the world can change quickly. Todays effective credit risk management strategy might become useless and financially dangerous by next year. Risk management should be an ongoing process that allows a lender to reposition with constant market changes.
This is even truer for lenders forced to make considerable pricing structure changes to cover financial losses. By regularly evaluating their strategy, lenders might decide losing some of their best customers is worth the risk. In this type of situation, lenders should revisit this strategy regularly to ensure its relevancy. Lenders must refrain from returning to complacency as the economy recovers.
Lenders must make acquiring the tools necessary to survive in the rapidly changing financial sector of todays economy a priority. Outdated technology does not provide the agility and flexibility needed. By updating their credit risk management strategy, lenders can ensure making wise financial decisions.
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