Credit Risk Management

Introduction

Many institutions such as banking and enterprises are well-known to its wise usage of financial sources. The appropriate management of the financial sources and attributes makes it competitive for the organization to endure the different economic uncertainties and threats. In addition, the strategy on managing the risks can be the most desirable strategy of the company that cannot be deteriorated but can be passed through the next generations of other managers.

Background and Problem Statement

The assessment of risks can be the basic strategy in all of the organizations. Through the assessment of the risks, the organization can create a weighted decision and well plan. This all can help the success draw out from the process. In the classification of various system that are involved in the assessing and managing the risk, the credit risk management is an emerging activity that lies within the organization. Many researches attempted to answer the benefits of the credit management within the organization. However, it remained unclear for the management on how to manage and the purpose of the credit risk management.

Research Objectives

The first objective of the study is to deliver the purpose as well as the center of the credit risk management. Second is to discover the different actions of the management or the managers regarding the credit risk management. Through this two interrelated objectives, the study can establish its common ground in discussing the essential parts of the credit risk management.

Literature Review

The credit risk management is popular among the banks and other financial resources. The main purpose of the credit risk management is to lessen or diminish the effects of the non-performing loans came from the consumers. The procedures and processes of the banks and their affiliates create a great impact in the flow of the financial resources. However, various economic uncertainties, international markets, or financial constraints can cause the financial status to be unstable. Aside from the financial deficiencies, the other causes of the financial constraints are the lack of confidence among the financial market to provide external help for the needed consumers, lack of capability to gather the information of the consumers, and the lack of push to have an aggressive debt collecting. The non-performing loans can definitely cause too much stagnation of the financial sources. To provide the credit risk management effectively, the banks and other financial institutions should asses the credibility of the loaners. In terms of an enterprise, the assessment of their credit portfolio is enough to provide a system that continuously promotes the reviewing the risks and the capability of the business enterprise to pay.

It is very common that the banking process limits the occurrence of the risks during every transaction; therefore, the bank managers should also rely on the effectiveness of the imposed regulations to anticipate the future risks. From the different financial indicators, the position of the institution on the market failure are still depends on the internal process and the actions of the people. The economic theory in banking encompasses the interest and income theory in which is the basis of the cash flow approach in bank lending (Akperan, 2005). Credit risk management needs to be a robust process that enables the banks to proactively manage the loan portfolios to minimize the losses and earn an acceptable level of return to its shareholders. The importance of the credit risk management is recognized by banks for it can establish the standards of process, segregation of duties and responsibilities such in policies and procedures endorsed by the banks (Focus Group, 2007).

Credit risks appear in banking institution because of the uncertainties plagued the financial system. The uncertainties remain a major challenge in country. Still, the major approaches applied by the banks are the continuing efforts on research and close monitoring. Banks believe that the research and monitoring are the key sources of uncertainties like data generating institutions and the treasury (Uchendu, 2009). The market structure is important in banking for it influences the competitiveness of the banking system and companies to access to funding or credit investment. The economic growth affects the structure and development of the banking system. In addition, the vast knowledge in risk assessment and managerial approach is recognized as part of the development. Moreover, because the banks and the processes are highly regulated, it became very useful in assessing the effects or impact of the credit risk management in the banks and even in other financial sources (Gonzalez, 2009).

References:

Akperan, J., 2005. Bank Regulation, Risk Assets and Income of Banks in Nigeria [Online] Available at: http://www.ndic-ng.com/pdf/adam.pdf [Accessed 08 March 2010].

Focus Group, 2007. Credit Risk Management Industry Best Practices. [Online] Available at: http://www.bangladesh-bank.org/mediaroom/corerisks/creditrisks.pdf [Accessed 08 March 2010].

Gonzalez, F., Determinants of Bank-Market Structure: Efficiency and Political Economy Variables, Journal of Money, Credit &Banking, Vol. 41, No. 4.

Unchendu, O., 2009. Monetary Policy Management in Nigeria in the Context of Uncertainty. [Online] Available at: http://www.naijalowa.com/wp-content/uploads/2009/08/Monetary-Policy-Management-in-Nigeria-in-the-context-of-uncertainty.pdf [Accessed 08 March 2010].