The credit risk scorecards

The financial institutions have a sort of love-hate relationship with the credit risks involved. Despite being a source of their earning, it can all lead to the utter destruction of a firm if not tackled properly. The financial institutions deal with credit risk on daily basis as a routine, which is the reason why they depend upon the strict implementation of a Balanced Scorecard.

These scorecards help the institutions measure the performance and progress by allowing them to handle the credit risks in a timely fashion and effective manner. The financial institutes can obtain the finance scorecards through various channels. One of them being the credit risk vendors, who work outside the institutions and are not a part of the official roster of employees. However, they do work for other lending companies due to which they are familiar with the proper and efficient developments of credit scorecards.  This can prove to be helpful for many financial institutions in their management of the credit risk management.

But in the recent times these external scorecards are being replaced by the use of in-house credit scorecards due to the fact that technological advancements are becoming increasingly extensive, making it easier for financial institutions to develop their own credit risk scorecards. Such an approach is more helpful and advantageous in the management of credit risks, the foremost advantage being lesser costs, as compared to the ones being used outside the company.

Since the use of such a support system would be an in-house decision a reasonable budget can be allotted. Also making scorecards according to the circumstances of the firm will be more effective as it would include all the factors than need to be pondered on. This would also speed up the process of scrutinizing itself, as there would be no external factors to depend upon. As compared to using the external scorecards Balanced Scorecards, would allow more flexibility when it comes to identifying the metrics or indicators and the process of scoring as well, as there would be no stringent set of rules or systems to be followed.

Apart from simply collecting and retrieving data, which is later converted into useful information for analyzing, studying and examining the various factors involved in the aspects of credit risk management, the Balanced Scorecards provide effective tools for the presentation of this data through stop lights and strategy maps.

The stop lights are the three colored warning indicators of light that appear next to the issues or factors that need to be focused or show aversion from the set goals and targets. They however can be customized and be turned off during a meeting. The strategy maps on the other hand provide a way to study the interrelation that exists between the various metrics in order to understand their influence over the credit risk collectively and individually.