• Credit risk: assessment methods and ways to minimize

    Credit risk

    In all financial credit relations there are two interacting parties - the borrower and the lender. And in this case, the lender carries certain financial risks. But the lender takes a conscious risk, taking losses in case of non-fulfillment of financial obligations by the borrower.
    Considering the credit financial relations between enterprises and banks, one can see a significant connection between the subjects. On the one hand, the bank that issued the loan to the enterprise bears the risk of non-repayment of the debt by its borrower on time and in full. On the other hand, an enterprise that has available funds and places them on its bank accounts may lose them completely if the bank is liquidated. In addition, the company may receive less profit at interest rates of the deposit. For example, the bank knows that the company is a stable investor,and does not offer a high interest rate on the new deposit, which the company could get in another bank when placing free funds there.
    Since credit risks exist throughout the crediting period, lenders use various methods to evaluate them.

    Credit Risk Assessment and Minimization

    The most common and proven method of risk assessment is scoring. When working with this method, a scoring card is compiled. In this card, on the basis of the borrower's questionnaire, estimated points are set, which form the threshold for deciding whether to lend to the applicant or refuse. When using the scoring method, it is necessary to consider the regional economic level and the conditions in which the borrower lives.
    Often, when considering applications for a loan, they follow the so-called �manual assessment� method of credit risks. When using this method, the time for issuing a loan may be delayed, since the bank employee needs to manually check the information from the applicant's questionnaire using various bank bases. And this is the internal history of the bank, the base of credit histories.This method is safer for the lender against risks.
    When conducting a credit risk analysis, the amount of the largest loss that a lender may incur during the entire term of the contract is determined with the maximum possible probability. Potential lenders can take advantage of the recommendations of the Basel Risk Assessment Committee.
    When using these methods can significantly reduce the risk on loans. Also, to minimize the risks, we can recommend the introduction of insurance premiums for lending, the establishment of limits for banking operations, and the reservation of money in case of losses.

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