Have you ever wondered why credit risk management is important? Of course, because it has to deal with money! How a financial institution lends the money and to whom are essential factors that must be determined accurately. Why? Because lending money involves certain risks, such as the risk appetite a financial institution has in case the money is not paid, or money laundering, terrorist financing or the risk of front and shell companies, among others.
So, how to do it? Let’s start with the basics: Know Your Customer.
By knowing customers financial institutions can define if that company or individual is subject to credit. No one wants to lose money…or involve lawyers because someone doesn’t pay! It also helps to make sure financial institutions know that: money is lent for legitimate purposes (and not terrorist financing), money will be paid as agreed by both parties and that money comes from legal sources.
Financial institutions also have to make sure there are no conflicts of interests; that all customers get the same conditions and there are no exceptions. They also have to deal with a challenge: digitize the information of customer’s files for faster decision making and/or a quicker customer service. Speaking of, they also have to ensure all customers’ information is protected complying with data protection laws and any accounting or tax rule.
Internally: they’ve to monitor or track external events (economic, financial, etc.) to adjust the interest rate. In addition to train and generate awareness among employees of the consequences that a fraud or mismanagement can generate to the company: a severe damage to its reputation and image.
No wonder the importance credit risk management has! Even for all of us: if a financial institution that has most of the market share runs out of money, its crisis will affect the country’s economy.
By Mónica Ramírez Chimal, Partner of Asserto RSC, Mexico City
Do not miss the chance to attend our 4th Annual Credit Risk Management Forum on the 24th and 25th of May, 2018 in the vibrant city of Prague.