Credit risk professionals grapple with the aftermath of prolonged COVID lockdowns, business closures, supply chain disruptions, and geopolitical unrest.
Credit risk portfolio managers adopt creativity and vigilance as new norms in this landscape. The current business environment demands fresh perspectives on identifying and monitoring avoidable and unavoidable risks to mitigate their impact.
Credit Portfolio Management Foundations:
Credit Portfolio Management involves overseeing all aspects of a company's credit portfolio, allowing proactive measurement, tracking, and action on emerging risks affecting organizational profitability. This encompasses evaluating key performance indicators (KPIs) like Days of Sales Outstanding (DSO), bad debt, disputes, and collections.
The effectiveness of Credit Portfolio Management lies in harnessing internal customer data to develop robust portfolio segmentation and treatment strategies. The initial evaluation may reveal portfolio data residing in disparate systems, leading to information inconsistency or gaps. Instead of feeling overwhelmed, focus on identifying these gaps to prioritize efforts to improve overall portfolio data integrity.
With a solid understanding of the portfolio, you can build trends and take actions such as reviewing high-risk clients or adjusting credit lines on low-risk, high-potential accounts. Portfolio Management often incorporates analytics, including predictive credit risk and fraud scores, to identify future risks proactively.
Effective Portfolio Management:
The first step to effective Portfolio Management is inventorying your portfolio and establishing a performance baseline. Depending on your organization's structure, you may have one or multiple portfolios, each with varying baseline performances. Understanding available customer data guides the derivation of insights before considering external data sources for standardization or augmentation.
The evaluation may reveal data residing in various systems. Leveraging existing ERP systems or platforms like Experian's BusinessIQ can streamline the Portfolio Management process. As you advance, introducing Portfolio Scoring, which appends credit scores and other risk data, enhances automation and benchmarks portfolio performance over time.
Credit Scores:
Credit scoring emerges as a straightforward approach to introduce risk automation to portfolio management. Scores, whether generic or custom, play a crucial role in assessing credit risk for both new acquisitions and existing customer management. The article delves into various types of scores and recommends machine-learned scores for improved predictive performance.
Reports to Help You Decide:
Choosing the right reports is pivotal in Portfolio Management. Experian offers diverse reports like the Premier Profile Report, Intelliscore Plus Report, Business Owner Profile, Small Business Financial Exchange Report, and Small Business Credit Share Report. Each report serves specific needs, ensuring a comprehensive evaluation of customer risk.
Establishing a Sound Credit Policy for Portfolio Management:
Automation in Portfolio Management involves creating rules or weighted scoring approaches aligned with your credit policy. This ensures systematic identification of risks in the portfolio while complying with organizational policies. Automation tools like DecisionIQ facilitate scenario creation to meet various objectives, significantly saving time and resources.
Staying on Top of Things with Alerts:
Proactive alerts like Experian's Account Monitoring Service add more vigilance. When appropriately configured, these alerts notify credit managers of critical issues, allowing timely adjustments to risk levels and safeguarding the company from financial loss.
Collecting Outstanding Debt with Collections Prioritization
For cases where traditional collection methods prove ineffective, a Commercial Recovery Score (CRS) aids in predicting the likelihood of recovering commercial debt over the next six months. Prioritizing collections based on CRS ensures efficient resource allocation, focusing efforts where they are most likely to yield results.
Is it Fraud or Bad Debt?
Late payments can indicate either delinquency or potential fraud. Introducing scores like Experian's First Party Fraud score during account origination helps distinguish fraudulent accounts, reducing risk and improving the overall customer experience.
Final Verdict:
Effective Credit Portfolio Management involves a dynamic interplay of data, scores, and automated tools. As businesses evolve, adopting robust Portfolio Management practices ensures resilience against risks and contributes to sustainable growth.
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