Curb Credit Risks with Balanced Scorecards

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.