There are a variety of successful ways to manage credit and reduce problems with loans. Many institutions have concerns, as a result of the current economic problems and uncertainties, regarding the commercial credit associated with loans and credit management. The over emphasis of the potential growth of loan portfolios along with incidences of corporate misconduct amongst staff and management have been dramatically exposed since the crash of 2008. Serious consequences have resulted for those businesses found to have been either involved, implicated in poor risk management.
The most effective risk management begins with a responsible underwriting policy, and should include loan structuring, supported by detailed documentation. Once a loan has been secured, those individuals responsible for its repayment should be held accountable for monitoring, evaluating, and acting upon any credit issues.
Minimising problem loans starts with implementing a system of best practise. This should demonstrate the ability to identify potential issues, implementing the appropriate solution to remedy the situation, and minimising any potential lender liability. The principles of credit analysis and the context of loan management should be integral to the successful implementation of the system. Familiarity with the legalities of both documentation and forms, and account development involved in the process, is essential, along with performance monitoring and the awareness of the potential impact on institutional reputation and performance.
There are considerable legal issues that personnel should have a clear knowledge of, including the waiving, cancelling and accelerating of loan covenants, fraudulent conveyance, bankruptcy issues, due diligence and environmental law.
Some of the skills required to carry out these functions include, being able to successfully identify possible credit risks, being able to determine the level of monitoring required, and identifying the right type and amount of information needed to be able to make those decisions. Evaluating the change in credit risk in order to determine if and when action needs to be taken is critical, in order to be able to recognise and appraise the warning signs of emerging problems.
Possessing the skills required in assessing both internal and external factors, which may have an influence on the credit risk, are vital. Having identified and monitored any issues, formulating and recommending a strategy to deal with them is equally, if not more important still.
Tim Aldiss writes on behalf of Omega Performance – the place to go for credit analyst training.