If you have ever lent money to
someone, you know the apprehension that comes with lending, considering the
uncertainty of receiving your money back. Even though the borrower is someone
you know well, you will at least be a little skeptical before you hand them
over your sweat & blood. Nevertheless, when you go ahead and lend the money
for trust’s sake, you have now exposed yourself to what is called a ‘credit
risk’.
On a broader scale, many organizations
are constantly exposing themselves to credit risk. If you are a supplier of
goods, you may have to give your customer a 30-day or 60-day credit period for
payment. Conversely, you may have to make the advance payment to your suppliers
while still waiting for your supplies. Then there are banks & financial institutions
whose entire business is to lend money for a profit - in which case - every
transaction is a credit risk. Late payments or defaults in payment can lead to
loss of business, increased collection cost and interruption of cash flow.
Financial institutions, therefore,
rely on credit risk models to determine the credit risk of their borrowers. Credit risk modelling refers to the process of using
data models to find out probability of the borrower defaulting on the loan and
its impact in case of default. It guides their decisions on whether or not to
sanction a loan as well as their interest rates.
CRIF’s expertise in credit risk
assessment
CRIF provides a full portfolio of
credit risk modelling tools and expertise, empowering business analysts, from
beginners to advanced modelers, to develop, build, test, deploy and manage
predictive models. Credit risk assessment enables an organization
to collect relevant data about the business partner before entering into a deal
with them. Credit risk can be assessed using parameters such as financial
ratios, credit scores, credit ratings, credit information report or business information reports.
Risk assessment has to be a continuous process to be relevant and effective. It
is best done by external auditors, such as CRIF, who are experts in this field
and come without any bias.
The significance of credit score in
credit risk assessment
The credit score is a numerical measure of Credit Risk. It is
calculated based on various parameters such as past payment history, loans
taken, spending ratio, etc. Credit scores are allotted by special organizations
called the credit information companies. Whenever lenders are requested for a
loan, they perform a credit check on the borrower to find out their
credit score before lending the loan. There are 4 such companies in India
empowered by the RBI to assign a score. Every bureau has their own unique credit scoring model which is the statistical analysis
used to evaluate your creditworthiness. These agencies select statistical
characteristics found in a person’s credit payment patterns, analyze them and
come up with a credit score. All these factors help identify the financial
character of a person or a business. Accordingly, there are two types of credit
scores, a personal credit score - which ranges from 300 to 900 in India, with a
score above 650 considered good and financially trustworthy. If a person's
credit score is under 650, many loan lenders abstain from lending them or
charge a higher interest rate. A lender’s credit analysis may take into account
other factors such as available investments, collateral property, income or
cash on hand. A credit score for business loan is called the Business Credit
Score which is similar to personal except that the entity whose score is being
calculated here is an organization. The scores are calculated considering the
financial history of the organization.
How do corporates asses
risk using business Information reports?
For a business, there are two main doors from which risks can
enter, the supplier and the customer. CRIF provides business information report
for businesses, to help companies analyze the creditworthiness and legitimacy
of the business partner. BIR provides an in-depth profile of a company,
including financial statements, business trends, history of business, ownership
details, operational information, and details on related firms and any special
events that occurred in the past involving company management. CRIF also
provides a risk indicator and an indicative credit limit to support business
managers with their decision. These reports are not just limited to India but
include many countries worldwide. You can start your risk assessment by
checking your own or your business credit
score at
CRIF HighMark.
