Credit Risk Management and Balanced Scorecards

Credit risk is the calculation of the money value with the on-going danger of default or loss in case the debtor does not make timely payments. One of the tools that financial institutions use to distinguish the risks associated with their money borrowers is interest rate. This allows such institutions to gauge the risks associated with the borrowers.

From the financial institution’s point of view this is the mapping out of the fiscally healthy customers to enrich the customer database maintained by the company and ensuring that they will not pose threats to the organization by defaulting their payment or following the schedule of payments in an untimely fashion. The explicit tools utilized by these organizations bearing the credit history of the customers play a crucial role in determining significant decisions related to financial aid, keeping in view both the aspects of the borrower and the lender. Such tools like Balanced Scorecards sum up the customer related factors as indicators or metrics pre-defined with ranges for ease of extracting results. This score in turn helps structure the customer profile of the clients’ and assesses the financial funding process.

However, Calculating the value of credit risk and the instances when a defaulter’s credit worthiness deteriorates is a pain staking and complex job mainly because of the lack of a liquid market and because only default probabilities can be determined from past data or speculation and lastly because correlations are difficult to measure or observe.

The financial executives of any organization breathe the essential information dwelling virtually all around the firm.  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, review and monitoring.  Balanced Scorecards offers a variety of powerful tools that are not only swift and flexible but are extremely user-friendly.

Balanced Scorecards offer visualizations that are appealing and logical. For example its use of stop light which are indicated as a red, yellow or green triangle and appear next to the indicators that require attention, which can be adjusted according to specific performances and turned off as well. These spot lights can also be used in the reports for the purpose of data communication. This allows data to become easy to be tracked and comparable against its defined measures.

Such a system is important for financial organizations as it allows resolution of exceptions to policy and enable management preemptively review while providing a rationalized, unified and consistent approach for gathering information and reporting and improvisation.