Objectives of Credit Risk Management

Credit risk management is chiefly responsible for the protection of an organization's lending assets. It must also provide internal communication to its credit representatives with policies and procedures that reduce ambiguity and allow them to best fulfill their duties. Another important objective for credit risk management is customer retention. Other objectives must be met while keeping customers loyal to insure current and future sales.

Risk Reduction

Credit risk management satisfies it primary objective of risk reduction through credit analysis and review. Credit analysis is the research and investigation required to determine the risk involved with lending to a customer. This is performed by using information from credit applications, public records and credit reports. Credit applications provide information like the applicant's name, address, age, Social Security number, driver's license number and credit references. Information from public records may include judgments, liens and business registrations. Credit reports provide financial information from credit bureaus like Experian, Equifax and Trans Union. They can reveal an applicant's credit lines, payment history, legal information (bankruptcies and judgments) and credit score. By researching and investigating an applicant's financial background, credit risk management is able to gauge the risk involved in doing business with him. For established customers, a credit review process should be employed to stay familiar with the credit situation of clients. This process allows for credit limit adjustments and other actions to reduce the company's credit risk.

Internal Communication

Credit risk management must provide internal communication to its credit department and representatives. This not only allows them to fulfill their obligations in risk reduction, but also allows them to operate more efficiently by providing clear instruction on how to perform or act. Through the use of credit policies and procedures, credit risk management is able to better satisfy this objective. Credit policy defines the rules and guidelines regarding the performance of lending functions within an organization. This can include target customers, interest rates, loan amounts, collateral requirements and other risk analysis requirements. To provide the credit department with specifics on how to achieve the company's credit policies, credit procedures are used. These procedures can include information requirements for the investigation and analysis of credit. They can also detail information about the credit approval process, account suspension notifications and circumstances requiring management approval or notification. Credit policies and procedures reduce ambiguity amongst the organization's credit representatives. This facilitates an easier and more efficient approach to credit risk management.

Customer Service

Providing good service is necessary to retain customers. The company's marketing and sales departments are directly responsible for sales by attracting new clients. Credit risk management, while not charged with making sales, are still indirectly responsible for them in how they treat clients (customer service). Being polite and professional are rudimentary skills. But learning to work with customers, while satisfying a risk reduction role, takes training and development. Without good customer service as a basic objective, the organization stands to lose customers. Hard credit measures such as overly-conservative credit limits, payments terms and collateral requirements can chase customers away. Without customers there is no need for credit risk management, as the organization will naturally cease to exist.

Departmental Coordination

Another objective of credit risk management involves coordinating with other departments. By working with the collections department, credit risk management is better able to stay in touch with customer payment issues and possible financial problems. Coordinating with the accounting and finance departments can provide information regarding cash-flow requirements and possible changes needed regarding financial risk. Communicating closely with the sales department can reduce internal and external conflicts regarding account decisions.