Credit Risk Measurement

Gauging the performance of retail banks can be a touchy endeavor. But with the help of metrics for retail banking, the whole endeavor is certainly made easier to achieve.

It is easy to assume that the management or the operation of a retail bank is an easy job to handle. This is not true at all. This is because you have so many factors and aspects to deal with so analysis should be made extremely accurate and precise. Without concrete analysis, especially when this pertains to performance and progress, any retail bank just might flop. Thus, it is a wise move to implemented metrics for retail banking.

But before we go into retail banking metrics, we should first define what a metric is all about. A metric is actually a quantifiable measure that you can use to gauge the current performance of a business. In this case, it would be the bank’s performance that would be gauged and this would be matched against its own corporate goals and objectives. Just how far along is the retail bank at when it comes to achieving these goals and objectives? What can be done to ensure that the bank is indeed treading on the right path? These are just some of the questions that you need to ask when you are dealing with retail banking metrics.

With that said, just what then are the metrics that you can use for your retail bank? The underlying concept to remember here is that the metrics should be related to the bank’s overall performance. This is quite a broad perspective to deal with, which is why it would be wise to use metrics to make this endeavor a bit more specific in nature.

The total cash deposits received by the bank per month is one of the metrics that you can use for retail banking. This is quite an effective metric because it shows you how effective your bank is when it comes to attracting clients and enticing them to make more deposits with your enterprise. Retail banks do earn profit from their clients’ deposits, after all. This is precisely why this is a useful metric to use when gauging the performance of your retail bank. A related metric here could be the average annual deposits made by the bank’s clients as well. This retail banking metric should also be used.

Another example of a useful metric could be the ratio of active depositors to dormant ones. Unfortunately, not all accounts that a bank holds would be active. There would certainly be some dormant ones lying around. Having a large portion of dormant accounts is not good for any bank. Having a larger portion compared to that of the active ones is a strong indication that the enterprise just might be doomed to foreclosure. Thus, this is a metric to consider as well.

Rate of borrowing risk should also be included. Banks are just about the first choice when it comes to lending institutions, which is why banks deal with a lot of loan applicants on a daily basis. This is also a means to generate income on the part of the bank so this is indeed a worthy metric to consider.

Now that you have the basic metrics for retail banking, you can then move on to choosing which ones you will use. Just remember to choose a relevant few so that you would not be complicating matters in your hands.

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The PRO version also suggests powerful Strategy Maps feature, which allows automatically export data from KPI into nice-looking strategy maps with all necessary diagrams and arrows.

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One can effortlessly find rid of the dilemmatic circumstances that happen in the life of an association when it approaches to manage workers matters by assigning sensible targets for the workers. In addition, it is promising to build way from side to side this network of certainty by reflecting those in terms of KPI, Key Performance Indicators.  This work can be attained honestly by making oneself conscious of the powers and flaws that exist in the corporation.The limits serve the double function of not only bringing to surface the areas that needs anywhere but also permit in counting the approvals. Therefore, a necessary and neutral picture of the functions is gained with the pertinent set of actions. With such an instrument in hand, users can be guaranteed of entire tracking of the given issue.Moving on, making enhancements gets easier as the procedure can be assumed steadily together by means of making definite that there happens best consumption of possessions.Inculcating the accurate set of abilities and making the team associates competent of handling matters sets the correct tone for developing a victorious association. This is certainly easier said than done as the directors are required to remain a sharp-eye on the altering situation for bringing the accurate educational values in workers. In addition, these fluctuations are to be reproduced in the connections planned in later times.Taking such steps also promote a logic of belongingness in conference takers; in that way setting the juncture for improving the group or team strength. This can show to be an hugely important issue in future times as just when a talented personnel has been developed that one can be guaranteed of farm duties being satisfied to the utmost level.Though, as one gets into the work of assembling such instances, it is realized that a number of features are to be taken care of. Moving on, realizing the significant position detained by the capability of a team to adapt, one is believed to make definite that belongings are skilled and oriented towards the transform. This can be guaranteed by having a quantifiable approach such as balanced scorecard under restraint this will send all the quandary that can happen for a toss and offer directors a way for knowing about even those circumstances that can be a bit hard to achieve out for. The potential detained by this policy is well proved by the reality that countless associations have set it to apply and have benefited enormously. The indicators to be exposed on a training scorecard should be such that a absolute and complete perspective is gained on different matter and situations.

Our day to day decisions involve risks. It is unavoidable phenomenon in financial and economic decisions. Same is the case with credit process. Before we have a look how credit risks can be curbed. Let’s know what is credit risk?

Credit risk means the risk that loans will not be repaid by the borrower. It may be the non-payment of loan or the other line of credit (the non payment of interest or principal or both). It is loss in terms of money which is at risk if the borrower is unable to pay. The companies who are involved in providing loans want to access the credit worthiness of the borrower. The assessment of the credit risk is valuable from the point of view of lender through this assessment it is made sure that the financial health of the customer is sound enough and it will not create problem while making payments in future.

As no one likes to bear loss so there should be some methods to avoid credit risk. In this connection, a scorecard that sums up the factors about the probability of customers in terms of indicators is a useful tool and helpful in measuring the credit worthiness of the customers. Balanced scorecard is one of the techniques to curb credit risks. Balanced scorecard is a financial performance measurement tool that correlates the organization’s strategy to its operations. The strategic objectives are mapped into performance metrics (also known as Key Performance Indicators-KPIs). These performance metrics are grouped into four categories:

1.                  Financial

Ø      To measure and increase ROI

Ø      Cost efficiency of purchasing operations

2.                  Internal Processes

Ø      Use of competition

Ø      Use of Electronic Commerce

3.                  Customers

Ø      Response time

Ø      Support Quality

Ø      On-time Delivery

4.                  Learning and Growth

Ø      Access to Strategic information

Ø      Employees Satisfaction

Not only it measures the current performance in financial terms,  but the balanced scorecard also evaluates the firm’s efforts for future improvements using internal process, customer and growth metrics. The “scorecard” indicates quantified performance measures and “balanced” indicates that the system is in balance

Ø                  Short term objectives and long term objectives

Ø                  Financial measures and non financial measures

Ø                  Lagging indicators and leading indicators

Ø                  Internal performance and external performance perspective

 Benefits of balanced scorecard 

Some of the benefits of balanced scorecard are as follows:

Ø                  Strategy can be translated into measurable parameters

Ø                  Communication of Strategy

Ø                  Due to balanced scorecard the individual goals get aligned along with the Firm’s Strategic objectives as the selected measures influence the employee behavior

Ø                  By getting the Feedback of performance results the strategic planning process can be restructured.

 Drawback of Balanced scorecard 

The following are the drawbacks that should be avoided while implementing balanced scorecard:

Ø                  As the balanced scorecard depends on well-defined strategy and there should be understating of linkages between strategic objective and the metrics. With out this, the implementation of scorecard will be unsuccessful.

Ø                  While using balanced scorecard, care should be taken to identify both lagging measures that describes past performance and leading measures that can be used to plan for future performance.

Ø                  For better implementation of balanced scoreboard, each firm should identify the measures that are appropriate for its own strategy.

In nutshell, the balanced scorecard is a beneficial management tool for financial institution and can be used to curb credit risk but for better results and perfect implementation of balanced scorecard it is necessary to keep an eye on strategic objectives and the linkage between strategic objectives and metrics.

There was once a time when General Motors knew and thrived on the fact that customers would buy any car it made. This was before the Japanese car manufacturers entered the U.S. market with great looking, low-cost cars. GM still didn’t realize the change in customer preferences and now the world sees the originator or many quality process controls file for Chapter 11. The Japanese on the other hand use the word okyakusama, meaning both ‘customer’ and ‘honored guest’.

Volumes on top of volumes have been written about the importance of customer relationship management and many thriving businesses are doing so for their great customer service ability. Home Depot’s service philosophy, called the best service philosophy in the United States by Wal-Mart’s CEO, states “every customer has to be treated like your mother, your father, your sister or your brother”.

A Balanced Scorecard adds greater effectiveness to this philosophy by giving the company measures and metrics along which to pursue its customer relationship policy while staying true to the business strategy and vision. The Balanced Scorecard is both a management as well as measuring system that takes into account both financial as well as non-financial perspectives of planning and implementing a business strategy. While allocating funds towards business promotion and customer service is essential, it is not the end-all solution. The Balanced Scorecard gives the Customer perspective its due place in the company’s setup; the company serves its customers according to its vision, and the vision when dictating the customer relationship strategy inherently carves out the market segment the company can serve best.

The Balanced Scorecard makes tangible use of customer satisfaction surveys and transforms them into metrics to gauge customer satisfaction, reasons for customer turnover, best practices in the industry, etc. It also takes into account the cost of customer service and support.

 A rise in number f customer complaints does not necessarily mean hiring more customer service reps, it may be that something is wrong with the internal business processes and is resulting in customer dissatisfaction. Since the Balanced Scorecard treats employees as internal customers of the company, it highlights the need for employee satisfaction. While at face-value pairing employees with outside customers may seem questionable, a second thought highlights that companies invest huge percentages of their revenues into employee training, and lack of employee satisfaction which ultimately leads to greater turnover, means a loss of both the investment as well as a competitive edge.

Simply put, an unhappy employee will take his/her frustration out on the job and ultimately the external customer. The Balanced Scorecard approach to customer relationship management ensures that all the bases are covered. By imbibing a sense of ownership and adequate knowledge into the employees, the company ensures that it is at par with its competitors and stands a might chance of outdoing them.

Financial organizations are having a rigid time managing up with the bend of the present that had determined on its own to extend itself. For any association all its actions and procedures have turn into market determined which makes them very weak due to the instability existing.Industry was never a safe business enterprise but with the pressure put in front of associations it has become tremendously hard for banks and additional monetary institutes to force into scattering credits with reliability and belief at bet.

Because of it associations are griping on to skill to get the utmost hold related to profit in this view. It is better to get smart hold up systems that can mix well with the previously fitted organization information scheme in order to decrease extra expenses. One such device accessible in the marketplace is “balanced scorecard”. It assists the monetary institutes to development information into a well-structures plan to tackle, tackle and better administer matters. Not just does it aid with the organization’s facts and operational requirements but also aids with the announcement and coverage requirements.

A few of the significant metrics in a credit risk score card comprise; capital sufficiency, unpleasant debt proportion, client credit superiority, credit risk, corporation and client viewpoints etc. These   metrics are resolute and connected to recognize their consequence on all other and trade as a whole. Additional exclusive set of tackles for arithmetical estimate accessible include; a plan map, that is used to decide the dangers concerned in an exacting movement or business enterprise. It is a visually attractive instrument that helps in understanding the information collected in outlook of its relations and can be useful throughout a management. On the other hand, metrics or indicators can vary from each other in their nature and efficiency which permit the establishments and associations to obtain a look at the better vision of understanding risks concerned in trades. One more such instrument can be confirm itself helpful during a arrangement is the stop light  which is a three colored, warning meter light that comes into view at the side of the indicators that require concentration.

With the support of time points directors can allocate comparative scores to an indicator in a point of time and modify it afterward for diverse circumstances. For time needy occasions, these ratings can be place according to the definite dates till which they will stay applicable. This does not influence the outcome as balanced scorecards collect information with respect to the defined times.

Balanced scorecards is a elegant system that permits applicable data to be composed as helpful information that can be evaluated effortlessly to prepare a solid result for an organization’s economic requirements. It helps in building a planned method to show associations and their administration through a full assessment of activities based on tasks divided, liquidity, asset income, monetary influence, and productivity.

The financial institutions have a sort of love-hate relationship with the credit risks involved. Despite being a source of their earning, it can all lead to the utter destruction of a firm if not tackled properly. The financial institutions deal with credit risk on daily basis as a routine, which is the reason why they depend upon the strict implementation of a Balanced Scorecard.

These scorecards help the institutions measure the performance and progress by allowing them to handle the credit risks in a timely fashion and effective manner. The financial institutes can obtain the finance scorecards through various channels. One of them being the credit risk vendors, who work outside the institutions and are not a part of the official roster of employees. However, they do work for other lending companies due to which they are familiar with the proper and efficient developments of credit scorecards.  This can prove to be helpful for many financial institutions in their management of the credit risk management.

But in the recent times these external scorecards are being replaced by the use of in-house credit scorecards due to the fact that technological advancements are becoming increasingly extensive, making it easier for financial institutions to develop their own credit risk scorecards. Such an approach is more helpful and advantageous in the management of credit risks, the foremost advantage being lesser costs, as compared to the ones being used outside the company.

Since the use of such a support system would be an in-house decision a reasonable budget can be allotted. Also making scorecards according to the circumstances of the firm will be more effective as it would include all the factors than need to be pondered on. This would also speed up the process of scrutinizing itself, as there would be no external factors to depend upon. As compared to using the external scorecards Balanced Scorecards, would allow more flexibility when it comes to identifying the metrics or indicators and the process of scoring as well, as there would be no stringent set of rules or systems to be followed.

Apart from simply collecting and retrieving data, which is later converted into useful information for analyzing, studying and examining the various factors involved in the aspects of credit risk management, the Balanced Scorecards provide effective tools for the presentation of this data through stop lights and strategy maps.

The stop lights are the three colored warning indicators of light that appear next to the issues or factors that need to be focused or show aversion from the set goals and targets. They however can be customized and be turned off during a meeting. The strategy maps on the other hand provide a way to study the interrelation that exists between the various metrics in order to understand their influence over the credit risk collectively and individually.

Operating a lending enterprise requires knowledge in measuring risk through credit metrics. This way, you can choose worthy people to do business with.

If you are in the business of lending, then it is highly important for you to know the concept of measuring risk through credit metrics. If you have had a lot of years’ worth of experience in lending already, then you surely understand the fact that not all loan applicants can be trusted. There will always be that risk that the borrower would default and this is something banks, lending firms, and other financial institutions should protect themselves from. This is why credit metrics should be implemented so as to measure credit risks properly.

This does not mean that it is perfectly all right for a lending institution to go ahead and judge any such loan applicant. The primary reason behind the implementation of credit metrics in the first place is so that there would be a systematic approach towards measuring credit risks. A lot of steps would have to be taken into account so that it would be accurately determined whether or not a prospective client is indeed worth the risk. And by steps, we mean intensive background searches, both personal and professional, as well as other sorts of endeavors just to get to the bottom of the pit.

Let us say that you operate a credit card company and you are in that esteemed position to offer additional products and services to your existing clients. With the many clients that you have, to whom should you offer these enhanced services then? Looking over stats and figures, you would most likely offer these to the clients who make religious payments to settle their accounts. This is the logical thing to do. However, logic is not the only thing that is needed here. Good for you if you are operating just a small credit card company so it would not be too much of a burden to run the stats and figures amongst your clients. But if you are operating at a global scale, then credit risk scorecards need to be implemented to make the weeding out process run faster.

Many people think that it is only recently that credit metrics and credit risk scorecards are being used. This is not true at all because credit metrics and credit risk scorecards have long been used. Insurance companies, for instance, have been using them for a long time already. Thus, no matter the industry, it really helps to know the basics on how to measure risks via credit metrics.

Back in the day, financial institutions were not equipped with the knowledge and basic tools for the creation of such metrics and scorecards. They then affiliated themselves with more experienced, more knowledgeable credit risk vendors that would develop the appropriate scorecards for them. But with the fast pace that technology now moves at, financial institutions are now equipped with the basic know-how in developing these metrics. The deciding factor here is the fact that software applications that are needed in creating these metrics are now available to virtually any company who wants to purchase them. More importantly, the metrics developed would be more aligned with corporate goals and objectives because it would be the company itself that would develop it. Measuring risk through credit metrics has indeed been made much easier.

The risk of credit is directly related to the calculation of money value which is at stake of loss if the debtor or the borrower fails to honor the commitments on time. This assessment of worthiness is crucial and valuable for the business organizations that act as the financing supporters to individuals and organizations in times of their need. The rate of interest determines the risk that is associated with the borrower. This is one tool with the help of which these financial institutions segregate the customers and the risk attached to them.

The credit history documents of the customer are the proof of their past records status. Accurate documentation provided eases out the plan of action between a lender and a borrower regarding the financial aid issues. In order to track, manage and gauge the factors involved in summing up a credit history which is a time taking and meticulous tasks any aid from the technological side is welcomed. One such support system fast becoming popular is the Balanced Scorecards, due to their effective and accurate results. It helps in summing up the factors involved in the probability of customers in terms of indicators. These indicators are then rated and scored which help structure a customer profile based on the financial funding approach.

Credit risk is more difficult to model than market risk for many various reasons. The lack of a liquid market makes it very difficult to price credit risk for a specific obligor and tenor. Also, the true default probabilities can be determined by either inferring default rates based on observed historical experience of the public credit ratings, or by analyzing the default rate through a subjective credit approval process. Lastly, default correlations are difficult to observe or measure, making it hard to aggregate credit risk.

This is why Balanced Scorecard is designed to optimize the structures and methodologies of the firm utilizing to the maximum the best of technology. It can make possible prompt insights to Key Performance Indicators and metrics help to identify the prevailing and upcoming trends and makes it accessible for study, analyses, evaluation and monitoring.  Balanced Scorecards offers a variety of powerful tools that are not only swift and flexible but are extremely user-friendly.

The results obtained through these metrics and indicators can now be shown with the help of Strategy Maps to the management who can identify the co-relationship that exists between these indicators and understand how they affect the credibility of the customer and the organization. In case immense variation between the set targets or required weight and the result obtained a red light appears next to those indicators highlighting their significance. These results due to stop lights which are three colored warning indicator tool used for the purpose of bring forth the issues that need concern and focus.

The four perspectives on which the assessment is based include; company perspective, customer perspective, expected loss and economic capital. The company perspective is measured through; capital adequacy, gross debt service ratio, customer quality ratio.

A banking organization’s operations ask for immense care and attention to be paid towards their conduction as even a slight deviation can trigger a chain of ‘negative reactions’. Thus, everything right from the taskforce to the most internal processes should be pulled together. This is possible with the balanced scorecard (BSC) that was developed by Norton and Kaplan in 1990s for helping in evaluation of both the ‘financial’ and ‘non-financial’ assessment of the company.

One is just required to bring together the factors that are found to be apt in communicating the situation to users in the form of banking metrics. These parameters will in turn be decided after looking at the underlying factors that affect the success of bank.

By learning the appropriate usage of information divulged by this scorecard, one can effectively get to the root cause of problems that surface from time to time. This trait has pushed several managers, who were on a search for ‘performance management and measurement strategy’ to opt for this solution for betterment of their processes. The metrics however, should be selected after judging their competency in reflecting the situation.