Credit Risk : Credit risk management and its control

The extension of credit has been established for many companies and financial institutions in the instrument of penetration and market depth, and hence the source of increased risk of loss and impairment of assets, then the waves of uncertainty when you do not have the personal advice or to mitigate the risks of bad credit.

Credit Risk .- "It is the possibility of loss due to failure of the borrower or counterparty in transactions direct or indirect resulting from the non-payment, partial payment or lack of timeliness in the payment of the agreed obligations." (The important thing is to set the value at risk (VaR)) "

It is important that banks or credit must judge the solvency of their current and future borrowers and efficiently manage your portfolio, taking into account that "to extend credit" can engage in three types of risks: 1) Risk of illiquidity, 2 ) Instrumentation and legal risk, and 3) Risk Solvency. The first refers to the lack of money by the debtor to pay, reflecting the failure of not being able to make payment within the predetermined period or undertaken after the date that was scheduled under the contract. The second caution or lack of knowledge in the conclusion of agreements, contracts, preparation of promissory notes, bills of exchange, or legal instruments that require the debtor to pay (information asymmetry) and the third risk could be incurred for lack of real analysis and identification of the subject of credit that has no assets or collateral for the payment of its obligations. This requires that the following procedure is adopted for research and credit analysis, reflected in a scoring of CEDIT. (Record qualifying clients). This is the basis for developing the model to be developed by financial institutions under the New Capital Accord (Basel II). To identify the probability of credit risks; adapting widely accepted models.

Therefore lending institutions should establish efficient patterns of administration and control of credit risk that are discussed in the business, in resonance with their own risk profile, market segmentation with the characteristics of the markets in which operations and products it offers, so it is necessary that each institution develop its own framework, which ensures the quality of their portfolios and identifying, measuring, control / monitor and mitigate exposure to risk and the expected loss in order to maintain adequate coverage of, or technical heritage.

The methodology for the management and control credit risk phases: identification, measurement, risk control and monitoring are essential to mitigate the risks: (See Administration and control of business risks by Felix Campoverde)

The criterion for the formulation of policies for granting credit to conservative or liberal, should not depend on whims and will of the directors, but in many circumstances and situations: Credit by type of customers and products, profiles of the prospectus credit , endogenous and exogenous factors (market) of the lender, and that granting a credit implies the need to balance the imperative of investing in the customer (business view) and, secondly, increasing the financial needs and costs (economic view). Depending on the situation at all times and circumstances, the institution must establish conditions or other policies for granting credit. For example, interannual periods, depending on the seasonality of the product or depending on the economic situation. (If you recall the issue presented in administration and control of business risk analysis of credit remains quantitative and qualitative).

The symptoms and signs of the behavior of the credit portfolio is essential for the classification of current and future clients, this methodology and analytical techniques based on historic performance of credit operations and quotas, to determine the expected loss on Based on the probability of default, the level of exposure and severity of loss for calculation of these components must have a database of at least three years immediately preceding, containing sufficient information to calculate expected losses .

To calculate the expected loss should be considered such factors as: 1) Probability of default (Pi), 2) exposure level of risk (E), 3) recovery rate (r), and 4) severity of loss (1 -r).

Its formulation is: PE = E * Pi * (1 - r)

Understood:



Probability of default (Pi), is the possibility of occurrence of partial or total failure of a payment obligation or the breaking of a contract claim, a contractually specified period;

Exposure level of credit risk (E) .- It is the present value at the time of the breach in flows which are expected to receive from the credit operations;

Recovery rate (r) .- The percentage of recovery carried out on loan have been breached;

Severity of loss (1 - r) .- It is the measure of loss that the lender would suffer after making all efforts to recover funds that have been missed, at this time are executed or guarantees must be received as dation in payment. It is worth noting that the severity of the loss is equal to (1 - recovery rate);

Expected loss (PE) .- It is the expected value of loss from credit risk in a given time horizon, resulting from the probability of default, the exposure level at

default and severity of loss.

To mitigate credit risk is often borne in mind that through information obtained from the client and the business relationship is a series of alarms that should be investigated and tested successfully:

* Arrears in payment of bills.

* runaway expansion in a short time. - (You must check their financial capacity).

* orders over consumption.

* Request repeated renewals .- (Evaluate each petition demanding guarantees to them.)

* Non-payment of taxes and social security contributions.

* expenses disproportionate to the activity .-

* decline in the local budget.

* Other ...

Emerge from these specific provisions, the individual analysis of each subject, estimates of credit losses, which are formed on one segment of the portfolio, under the current regulations of each country. (Control Agency). "You can not measure what you do not know" why should be identified to measure the probability of default.

The executive of Credit as part of its operational process should always be considered:

* Each credit application is an opportunity.

* Do not prejudge, but listen with interest

* Give credit to the softness and humility (not to give it as a favor)

* Rules can enrich knowledge

* Ensure that the client knows the contractual deadlines.

* Be fair and consistent in terms of discounts and surcharges

* Do not allow the customer to bring the negotiating

* Ensure that the figures are correct

* Do not pretend to have knowledge that does not really have (ask, investigate and guide)

* Look at the tree (advantages and disadvantages of credit)

* Thinking that is not only good but easy recovery.

* Do not commit prematurely to the Customer

* Do not give hope when there are none.

* Do not attribute the rejection of credit to other people

* Never assume an attitude of flight to the customer.

* Accept responsibility and make decisions quickly

* Simplify customer operations

* Check frequently the policies and procedures as Collections and Credit laws.

Remember that the success of this loan in full recovery of investment, and for this we must mitigate the risks in the process of granting and recovery.

"A GOOD CREDIT GRANTED A CLIENT well served"