Managing Credit Risks through Scorecards

Financial institutions are having a hard time coping up with the slump of the present that had decided on its own to prolong itself. For any organization all its activities and operations have become market-driven which makes them very vulnerable due to the volatility prevailing. Never was business a risk-free venture but with the threats put if front of organizations it has become extremely difficult for banks and other financial institutes to plunge into dispersing loans with credibility and trust at stake.

For this reason organizations are clinging on to technology to obtain the maximum support related to benefit in this regard. It is better to obtain smart support systems that can integrate well with the already installed management information system in order to reduce additional costs. One such tool available in the market is Balanced Scorecard. It helps the financial institutes to process information into a well-structures strategy to confront, tackle and better manage issues. Not only does it help with the organization’s data and operational needs but also assists with the communication and reporting needs.

Some of the important metrics in a credit risk score card include; capital adequacy, gross debt ratio, customer credit quality, credit risk, company and customer perspectives etc. These   metrics are determined and correlated to understand their effect on each other and business as a whole. Other exclusive set of tools for statistical evaluation available include; a strategy map, that is used to determine the risks involved in a particular activity or venture. It is a visually appealing tool that helps in understanding the data collected in view of its relations and can be handy during a presentation. However, metrics or indicators can 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. Another such tool can be prove itself useful during a presentation is the stop light – which is a three colored, warning indicator light that appears beside the metrics or indicators that need attention.

With the help of time points managers can assign relative scores to a metric in a point of time and change it later for different situations. For time dependent incidents, these ratings can be set according to the defined dates till which they will remain valid. This however, doesn’t affect the result as Balanced Scorecards gather information with respect to the defined dates. Balanced scorecards is a smart system that allows relevant data to be collected as useful information that can be compared easily to formulate a compact solution for an organization’s financial needs. It assists in building a structured methodology to guide organizations and their management through a detailed review of activities based on tasks divided, liquidity, asset turnover, financial leverage, and profitability.