Enhance Credit Risk Management Using Balanced Scorecards


With the depressing business cycles of today coupled with volatile market-driven economies and organizations with their complex programs and transaction structure are making credit quality plunge deeper into the quality deprivation pit, certain tools like credit risk management through integrated softwares are being used as powerful instruments to combat these issues and are being utilized by those with high business acumen.

Financial institutions, in particular banks, do not appreciate or afford defaulters of loans. This is why credit risk management is a must for today’s financial institutions. No business is risk-free. Every business has a set of risks attached according to the nature of the work and/or industry. However, dreaded are our risks associated directly with monetary values. It is because of this dread that we pay our finance gurus the highest offerings to watch over our financial portfolios and ascertain the highest returns and on their part they engage in the meticulous process of credit-risk management.

However, in order to formulate this process into a well-structured strategy a sophisticated and defensive management system should be implemented by the organization that encompasses issues as; generating consistent reporting framework, accurate and timely comparable results, communication of unified functions and operational methodologies across the organization, collecting data with a centralized storing database that supports vigilance and reporting needs.

Some credit risk examples include; cross default, insolvency, debt restructuring and obligation acceleration etc. which are directly incurred due to the fluctuation of trade finance, transaction settlement, interbank transaction and equities, bonds etc.

The question then arises – how can a firm ensure the efficiency or effectiveness of the management system. The solution to it lies in Balanced Scorecard; a software built to target organization’s informational needs entailing myriads of functions and their performances. This enables the firms to gain better information of their existing and potential customers. It helps focus on the importance of customers and base targets, goals and objectives on realized customer needs and recognizing the risks attached.

It helps build scorecards of customers to be rated in order to determine if the borrower is reliable to be granted with a loan or not. It also helps gather valuable information about the loan applicant from different point of views which is then stored in the central database for further review and feedback. Exclusive set of tools for statistical evaluation like strategy maps are then used to determine the prospect of the risks involved extracted from information earlier gathered and rated through indicators or metrics. These indicators differ from each other in their nature and functionality which allow the institutes and organizations to get a look at the larger view of understanding risks involved in businesses.