Credit Risk Management Functions

by Jim Franklin; Updated September 26, 2017
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Credit risk management is responsible for the implementation of actions that limit the lending exposure of an organization. It performs this necessary role through several functions aimed at reducing the risk associated with company financial assets. Credit policies and procedures, credit analysis and credit review help to prevent poor lending decisions and protect company investments.

Credit Policies and Procedures

A major function of credit risk management is the establishment of credit policies and procedures. Credit policy defines the rules and guidelines for how an organization performs its lending functions. This can involve the types of customers it will lend to, the loan amounts, interest rates, collateral and risk analysis requirements. Credit procedures provide the credit department with specific instructions on how to achieve the company's credit policies. This can include what information should be used for credit investigation and analysis, the credit approval process, account suspension notifications and circumstances that require managerial notification or approval. With the establishment of clear policies and procedures, a company's representatives avoid confusion in the lending process.

Credit Analysis

Credit analysis is defined as the research and investigation necessary to determine the degree of lending risk involved. This function of credit risk management is performed with the use of information pulled from credit applications, public records and credit reports. Credit applications provide necessary information to research an applicant's financial background. This can include their name, business name, address, age, Social Security number, driver's license number and other credit references. Public records information is then accessed using the credit application information. Pertinent information may include judgments, liens and business registration. Credit reports are pulled from credit bureaus like Experian, Equifax and TransUnion. Companies can also purchase credit reports through credit agencies like Dun & Bradstreet. These reports can reveal an applicant's credit lines, payment history, legal information (bankruptcies and judgments) and credit score. Some reports also assign a risk-factor number or rating. Companies cannot ascertain the lending risk involved without knowing their customer's financial background.

Credit Review

As important as credit analysis is to risk management and qualifying a client for a loan, the credit review process is equally important. Established clients may reveal financial difficulties through obvious actions like late payments and partial payments. Other clients' actions may not be so subtle (business closure, immediate default). By reviewing credit accounts and their history, an organization stays familiar with the credit situation of its clients. This allows for the adjusting of credit limits or other actions designed to reduce the organization's credit risk. The credit department and collections department should have a close relationship to achieve this goal.

About the Author

Based in Florida, Jim Franklin started writing professionally in 2009. His articles appear on websites such as eHow, where he covers topics ranging from home improvement to finance. Franklin has a Bachelor of Arts in business management from Florida Atlantic University.

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