Importance of Risk Management System

Think Before You Borrow

Borrowing money may not always be the last resort and can be a necessity when one really needs it for something important. But before you take that leap, there are some points to be kept in mind. 

• Is that purchase really that important?

Sometimes a person doesn't really realize if he or she does really need what they are wishing for. There is a difference between a need and a want and once that is figured out, you will be able to answer this question for yourself. If it is a house that you want to purchase and you really need to put in that much money for investing in property then you definitely can consider taking a loan from a bank. A lot of banks give good interest on home loans and you can consider it but make sure the banks do a proper portfolio check and better loan portfolio due diligence.

• Is making payments going to be easy?

So, all of these big loans don’t come that cheap and there will obviously be a big chunk of your salary that you will have to shell out every month in order to compensate for the EMI and loan repayment. As mentioned, the banks have strict policies on loan repayment and they have their best credit reviews in place to monitor your repayments from time to time. You need to ensure you pay back on time to avoid any issues or extra fine attached to your defaulting repayments. You have to know that you will need to squeeze your budgets and give up a lot of other financial luxuries in order to make these heavy payments. You should go ahead with the purchase only if you are ready to sacrifice a lot of further purchases in life.

• What if you can’t pay off?

Well, as said, this is going to put you in problems. Even though loan policy modifications keep happening for a bank, it is never going to waive off your repayments! That is one thing the policy will never include so yes, the repercussions can be harsh on you. Suppose you were to lose your job during the tenure of repayment, you will be under the pressure to find another one and if you don’t do that soon, you will be left jobless and penniless. Any late payment affects your credit ratings and that is going to put further future problems in front of you. Poor credit history affects even finding yourself a job! You might never be allowed to take loans again. So if you are unsure about paying off your loan, then you would rather taking it up altogether. 

• Can it be paid off as soon as possible

Yes, it can be. In fact your main focus should be to pay it off as soon as you can so that you are not burdened for a long time. The faster you pay the more relieved you will be and you will be out of the cycle of payments much faster. You should avoid being burdened by excess payments, late fees, interests, etc and hence paying off early will only save you from the demons of loan borrowing. 

These are the main questions you should be asking yourself before taking the plunge into the loan world. Make sure that you are capable of repaying that amount and only when you are secure about all the questions you answered should you go ahead and borrow money from a bank or from anyone else for that matter. Remember one thing though. A loan is a loan and ultimately has to be paid off by you. You can’t escape repayments and interests because it was never your money in the first place. Be a responsible borrower and pay back what is borrowed, money or anything else.

Orignal Source : http://goarticles.com/article/Think-Before-You-Borrow/9246817/

How Important Is Credit Risk Management

Credit risk is understood simply as the risk a bank takes while lending out money to borrowers. They might default and fail to pay the dues in time and these results in losses to the bank. Loan portfolio management is very important but most times a bank can’t fully determine if it will retrieve the money back because even if the borrowers have been paying their dues on time, the economy might change and change the way things have always been. 

So what do banks do then? They need to manage their credit risks. The aim of credit risk management is to maintain credit risk exposure within proper and acceptable parameters. For this, banks need to manage not only the entire portfolio but also individual credits. A review is vital for any bank’s long term success and future.  Loans make up for the biggest risk for any bank or lending institution. A good and reputed credit risk management company should be chosen for this task so that not only is there proper risk management but also good recommendations and correct estimates. A bank’s reputation is at stake with credit risks and this is not taken lightly at all by any of the financial institutions who are serious about their image and of looking at long term effects of the same. 

A few principles are important for credit risk management and if followed, the banks will be at ease about the whole risk management process. 

• The company chosen for credit risk management review should be reputed and confident of handling such a sensitive task. Not every company is capable of providing the right recommendations and it is the work of highly skilled professionals that should work on an organization as big as a bank. 

• Senior management of the financial institution or of the company chosen for the task should be responsible to drive procedures that identify measure and control credit risk. 

• All products, activities and services of the banks should be taken into consideration when considering credit risk. The risk of new products and services will be subject to proper risk management procedures before being executed. 

• Credits to individuals and companies should not be given without proper screening. There should be a process in place before lending out to anybody or any company.

• Existing borrowers and individual credit conditions should be screened under a proper system. 

• Banks should develop internal commercial loan risk rating systems that are in accordance with the institution’s size and activities. 

• The credit risk management company should be able to look into future economic concerns and potential changes. A plan should be in place for the same in order to manage everything effectively, both in the present and the future. The estimations given by the company should be close to accurate and only highly reputed and skilled companies can do such a task. 

These are just a few of the principles to be kept in mind by a bank and any other lending organization in order to minimize risks and maximize reputation. Credit risk being one of the most vital determinants of a bank’s economic strength should not be neglected in any of the products and activities of the bank, old or new. Hiring a consultancy and a management company that can do the needful with utmost precision and skill is one of the most important things for a financial institution to do. Managing credit risk is itself a risky task because a lot of predictions and recommendations are involved and hence there is no place for a loophole in this process. 

Orginal Source :
http://goarticles.com/article/How-Important-Is-Credit-Risk-Management/9242353/

Functions Of A Credit Rating System

Credit risk is the biggest risk for any financial institution or a bank. A bank’s performance, reputation and long term existence depends on how it manages this risk. Most financial institutions have failed owing to poor management of risks and hence losing out on capital through loan losses. Loan portfolio management plays a key role in determining the reserve required to counter loan losses.

Good credit risk rating systems focus on the bank’s safety by making practical decisions on loan reserve. Rating systems give an estimate of risks not only on a group level but also on individual level and this makes it easier for banks to determine trends in risk levels.

Commercial loan risk rating systems are important for other important functions as mentioned below:

• Loan pricing credit risk ratings guide price setting. A sufficient price for taking credit risk should be planned in order to compensate for capital risk. Incorrect planning can lead to imbalances.

• Portfolio management information systems aggregate risk and give knowledge about the risk’s trends within the portfolio. These are hence very critical to loan risk management and decision making.

• Portfolio management credit risk ratings influence a lot of a bank’s decisions to sell, buy or hold credit facilities.

Every bank has a different credit risk rating system and hence a different loan policy modification as well. Some attributes are common to all banks but the way they combine differs from bank to bank. The whole idea is to have a credit rating system that looks into the bank’s overall portfolio risk and risk ratings must be accurate. When risks change, the ratings should also change. A credit risk rating system should be close to flawless in performance on which the banks and financial institutions can rely without worries because as mentioned before, this is a vital aspect of any bank and it is a strong determinant of its reputation and strength of capital. A good review company should be associated with banks in order for the banks to successfully survive and thrive in any kind of economic conditions.

The importance of ALLL methodology

The allowance for Loan and Lease Losses (ALLL) is a reserve that banks and other financial organizations establish. This is in relation to the estimated credit risk within the bank’s assets. It was formerly known as the reserve for bad debts and is one of the most important aspect in regards to a bank’s reputation. If the estimated credit risk is high, the ALLL reserve should also be high to compensate for the incurred losses. The ALLL methodology is a vital aspect of any bank‘s safety and reputation. The federal bank examiners ensure that a bank has sufficient amount of money in the allowance reserve. It has a huge effect on the bank’s capital and is hence of importance to also the bank’s management and directors.

LLR methodologyvaries from bank to bank. Banking regulators must ensure that banks have appropriate resources to counter and bear losses that arise from defaulters and non-payment by borrowers.To determine a proper allowance banks should periodically evaluate borrower profiles and pending payment of loans in their portfolio. The ALLL is determined and calculated at the end of each quarter. It may also be done more frequently if it is suggested by the loan review process. This is something that can’t be neglected since the bank or the financial institution’s reputation and image rest on it. This determines the strength of a bank and its long term existence. Economic conditions are also to be kept in mind during the whole process. The future can’t be predicted and that is why an estimate of the possible future losses needs to be made in order to plan a reserve for the same.

There are a few challenges that banks face with regards to allowancefor loan and lease losses estimation. 

These challenges are as follows:

·         The process is manual and time intensive.

·         Proper documentation is necessary and producing that can be a tedious task.

·        

      New accounting standards have to be incorporated as per FASB and federal regulatory bodies.

But these challenges need to be overcome by the banks and financial institutions even though it must be a bit of a task and hence, a good and reputed credit risk management company should be involved in looking after the entire process. Association with a credible company brings in more relief to the bank and the bank can thusly enjoy good reputation and management of their loans at present and in future.