Credit Risk Management

Credit Risk Management in the digital age is a complex affair. Managing Credit Risks requires careful consideration of various factors, multi-disciplinary skills and comprehensive information such as:

• Reliable data on the basic 5 Cs of corporate credit risk assessment - Character, Capacity, Capital, Collateral and Conditions of a company
• Macroeconomic outlook
• Country risks covering dynamic economics policies and political development
• Market/Industry situation

Technology advancement with AI, Blockchain, Fintech movement and other innovative business models and the vast array of data and sources adds to the challenges in effective Risks Management. Acquiring and effective use of quality data and information is critical to derive insights to survive and thrive in the volatile, uncertain, complex and ambiguous global business environment.

Why is Credit Risk Management Important?

To stay competitive in the global markets, suppliers, manufacturers and almost all businesses often extend credit terms in their transactions. This can range from 30 days credit terms to even as long as 120 days credit terms. This leads to credit risks which the sellers/suppliers of goods and services need to manage. Good business credit risk management can mitigate such credit risk and protect against payment default or late payment which will greatly affect cash flow, the lifeline of any business. A well-managed business credit risk program also means that the sellers/suppliers can be competitive and win in the global marketplace.

How to manage credit risk assessment?

You need quality credit information in order to manage credit risk globally and this means that credit information which is accurate, comprehensive, timely and consistent in order to gain useful insights about the company that you are doing business with for your credit risk assessment. As sellers/suppliers obtain information directly from their customers during the negotiation, it is crucial to also obtain credit information from a competent and unbiased global third-party credit information provider like CRIF BizInsights. This is especially important for overseas transactions where regular visits and face to face meetings are not always possible. Even if you have gathered information directly from the customer, comparing and verifying the customer provided information will guard against unknown or inconsistent information that can lead to making the wrong credit decision. Such multiple sources of information in credit risk management is key to mitigation risk in global trade.

Key Challenges of Credit Risk Management

Inefficient data management

Inability to access quality data when it is needed reduces competitive edge and affects customer satisfaction.

Legacy system and low automation

Human errors, disparate data sources and manual processes can create a disconnect with the customers' needs.

Technology Mismatch

Information in traditional form prevents the efficient adoption of technology-driven credit risk management solutions and analytics, especially for Fintech disruptors.

Increasing complexity in fraudulent business practices

Fraudsters are increasingly skilled and technology-enabled. Historical data and inability to monitor changes is the weak link to fraud prevention.

Managing Credit Risk

Verifying your customer

There is still no substitute to knowing your customer. This is a fundamental best practice as it provides a strong basis for all subsequent actions in the credit risk management process. To get the best results you need relevant, precise, and well-timed information.

Information can be collected internally by sales and the finance department. But an external information provider, like CRIF BizInsights, can provide a well organised and comprehensive information in an easy-to-read reports. More importantly, the information from an external neutral party can provide is unbiased and gives a professional view on the credit risk of the subject company.

Such credit risk management information by CRIF BizInsights covers the 5Cs' of credit:

1. Capital - Net worth or long-term financial resources for emergencies
2. Collateral - Assets available
3. Capacity - Historical & projected repayment behavior – how do the buyer meet their commitments to you
4. Character - Experience of the management and perceived capabilities of the management
5. Conditions of the company - Net worth or long-term financial resources for emergencies

Analyse financial performance

General practice is a 3 to 5 years financial assessment of the company to understand any financial stress or business growth opportunities.

Financial information can quantify many aspects of a business over a time period and gives good insights on a company's business condition. Credit analysts also use financial ratios to compare the company's performance against standard industrial financial norms, over a time period of normally 3 to 5 years, or perform even just peer-to-peer comparison on the strengths and weakness of a company in credit risk assessment work.

Analyze non-financial risks

Often the most neglected area in Credit Risk Management is the domain of non-financial risks. It is essential to develop skills to evaluate those risks, with reliable data, in the following four broad areas:

• Industry
• Business
• Management
• Supplier

Whilst financial performance assessment is an important component in credit risk management. One should also look concurrently into understanding the industry, business, and management risks. This is especially important when a customer has significant exposure to a highly volatile industry. In such cases, risk manager also need to have knowledge of that industry or rely of third part expert opinion from domain experts or reliable research by external information providers like CRIF BizInsights.

Referencing the 5Cs' of credit, non-financial risks assessment also include understanding the business model, scalability of the business, strategic directions, activities of the business and its sustainability. Experience and capabilities of the business leadership and management team as well at its supporting vendors or suppliers must also be a risk manager's consideration in identifying, understanding, evaluating and mitigating credit risk.

You Need a Sound Supplier and Vendor Risk Management Strategy

For any business, procurement and risk management are closely linked. A sound Supply Chain risk assessment directly impacts the success of your manufacturing and operations activities and business growth.

A judicious third-party vendor risk management strategy is important for the following reasons:

• High quality and reliability of your suppliers and vendors can contribute to the success and profitability of your business
• A vendor risk management process with up to date information is key to this strategy and to make sure that your suppliers meet their contractual obligations and become your long-standing business partners
• You need data to safeguard your business reputation from supplier and vendors with dubious links, and avoid any conflict of business interest.

What Are Best Practices In Supplier And Vendor Risk Management?

Over the years the following best practices of MNCs and large organizations that manage a large pool of vendors and suppliers are being adopted by smaller business to manage cost and increase supplier reliability.

• Build an up-to-date database of suppliers with a detailed supplier assessment and enrolment process.
• Get a reliable and unbiased external source of data that can be integrated into your supplier management system.
• Monitor supplier's information and be alerted to changes so that major long-term projects are not jeopardised.
• Understand personal and company linkages to track conflict of interest issues.
• Build intelligence on suppliers to optimise purchasing power and reduce costs.