What Is the Meaning of Credit Risk Management?

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According to SAS, credit risk management is the process of managing the capital assets of banks and the loss of loan reserves. Credit risk itself refers to the likelihood of negative losses if a borrower fails to repay debt of any kind. Managing credit risk is a way of improving efficiency and attaining a competitive edge.

Moody's Analytics mentions credit risk management for community banks and credit unions. This form of management enhances the performance of banks while conforming these institutions to various regulations. Credit risk management entails collecting and assessing data across certain fields such as commercial real estate and financial analysis of a personal nature. Collecting data that is related or unrelated to finance and cash flows from deals and testing portfolio performance under certain stress factors are all part of credit risk management. Analyzing trends and understanding the impact of certain economic conditions are important as well. Getting an accurate depiction of customers and minimizing lending risks are crucial for community banks, and this pertains to businesses as well.

Experian notes the importance of credit risk management in small businesses. A great deal of business transactions are based on credit. Knowing if a new customer is a credit risk is a good way to protect businesses from potentially troublesome accounts. Checking the credit history of other businesses before fostering business ties falls under credit risk management as well. When a company does not require payment before delivering products or services, the credit risk profile of the company increases. Low-risk credit scenarios only require basic research about a particular company.