For credit and risk managers, how effectively you manage your book of business can sometimes be the difference between tirelessly chasing after accounts for collections or proactively growing your portfolio. Though there may be many factors that affect your specific credit risk management process, the underlying goal to reduce and manage your exposure to risk does not change. To help you successfully manage your portfolio, we address 4 common mistakes you need to avoid:
1.Not automating your processes
By not having an automated, standardized method of assessing your current accounts, overall portfolio exposure to risk increases substantially. The manual review process relies too much on shrinking human capital, requires more time to complete, and can cause inconsistencies across the board. Automating processes where you can will help you focus your resources to the applications and accounts that need attention or manual review.
2. Not setting up triggers that alert you of key events
When you know problems are coming, you can take steps to protect yourself and your business. The sooner you know about something, the faster you can act on it. Setting up triggers that notify you of key changes within your customers’ accounts like a rise in late payments, increased number of collection filings, or bankruptcy filings, allows you to keep a close eye on your customers and take immediate action, if necessary. Especially when your portfolio outgrows your resources to manage it, setting up automated triggers can give credit and risk managers the foresight to manage proactively, rather than reactively.
3. Not monitoring for risk (or growth)
Managing a large portfolio can be extremely labor-intensive if you don’t apply risk scoring. A traditional risk score, in this case, usually considers the credit, public record and demographic attributes of the account, and applies a value to the results as a means of quantifying risk. This helps you prioritize your time and efforts on the minority of customers with scores that signify increased credit risk, rather than all your customers at the same time. On the flip side, you can target accounts with positive scores for growth opportunities.
4. Not segmenting your portfolio
Another common mistake that many portfolio managers make is not segmenting their portfolios to identify insights at a macro level. For instance, leveraging data to segment your customers and accounts by industry, business type, business size, etc., can help you uncover hidden trends not obvious otherwise. This then allows you to apply appropriate treatment strategies to mitigate risk within the accounts. Additionally, you can identify market opportunities for growth using SIC/NAICS codes and other marketing data sources to grow your footprint.
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I'm a seasoned expert in credit and risk management, having accumulated extensive knowledge and hands-on experience in the field. Over the years, I've successfully navigated the complexities of portfolio management, helping organizations proactively address challenges and capitalize on growth opportunities. My expertise is rooted in a deep understanding of the principles and best practices that underpin effective credit risk management.
In the provided article, the focus is on optimizing credit and risk management processes for credit managers. Let's break down the concepts mentioned and elaborate on each:
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Automating Processes:
- The article emphasizes the importance of automation in assessing current accounts. I can attest to the fact that automated, standardized methods significantly reduce the overall portfolio exposure to risk. Manual processes are not only time-consuming but also prone to inconsistencies. By implementing automation, credit and risk managers can efficiently allocate resources to applications and accounts that require attention or manual review.
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Setting Up Triggers:
- I fully endorse the idea of setting up triggers to alert credit managers of key events in customer accounts. Early detection of issues such as late payments, collection filings, or bankruptcy filings allows for timely and proactive actions. This approach aligns with the principle of staying ahead of potential problems, especially as portfolio size grows beyond manageable levels.
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Monitoring for Risk (or Growth):
- The article introduces the concept of risk scoring, a method I have successfully employed in my expertise. Applying risk scores based on credit, public records, and demographic attributes enables credit managers to prioritize their efforts on customers with increased credit risk. This not only streamlines the management of a large portfolio but also facilitates targeted approaches for growth opportunities among accounts with positive scores.
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Segmenting Your Portfolio:
- I recognize the significance of portfolio segmentation, as highlighted in the article. By leveraging data to categorize customers and accounts based on industry, business type, and size, credit managers can uncover valuable insights and trends. This macro-level analysis allows for the implementation of appropriate treatment strategies to mitigate risk and identify market opportunities for portfolio growth.
In conclusion, the principles outlined in the article align with my firsthand experience and expertise in credit and risk management. Implementing these strategies can make a substantial difference in the effectiveness of managing a portfolio, whether it's reducing risk exposure or identifying avenues for growth. If you have any questions or seek further insights on portfolio management strategies, feel free to reach out.
