Drawing valuable lessons from past experiences in measuring credit risks

Learning from previous experiences is a trait that humans inherently posses. However many organization still fail to draw valuable lessons from previous situations and engage in risky credit undertakings. Financial institutions and more specifically banks need to always have a proactive approach to learn from their previous experiences and display an acute awareness for effectively monitoring and identifying potential credit risks. Another key aspect that they always need to keeping in mind relates to making adequate arrangements for capital against possible risks and a compensation matrix to tackle risk too needs to be constituted. Most experts agree that the business of lending has to be built on measurable and sound practise of credit management and hence the necessity of tools like KPIs come to light. With the help of a credit risk scorecard one can effectively devise a framework to optimise the lending process and reduce the prevalence of risky lending habits which has brought the downfall of numerous banking giants. Not only will it help taking the figure of non performing assets significantly down, the same metric can also be used to identify organizations that are the right candidates for extending credit.