How to Identify Early Risk in Credit?

December 9, 2020
Posted in Business
December 9, 2020 Parik Seth

No one wants to disturb the delicate balance involved in working credit. But, management of timely collections is a tricky business and even essential, and even more important because of the impact it has on working capital. 

To be as efficient as possible, you must have a system of checks and balances to identify early credit risks from customers. Minimizing losses is a core value in any business to ensure the financial health of your company and can be achieved by mitigating losses.

An additional benefit of checking early credit risk is that you can effectively facilitate early intervention and take corrective actions. Since false signals are possible, risk identifiers are generally integrated with credit risk management as well, the process for which weighs in several variables. But that’s a different story.

As a company is in its nascent stages, they often wonder which signs to be on the active lookout for, which ones indicate towards a potential pitfall, or which indicators need more attention than others and may lead to losses. 

Early risk identifiers focus on individual borrower behaviors, and your client servicing teams may have already begun to notice them. If you already have a systematic address process in place, chances are you’re in good shape.

In case you don’t have a process in place, this first set of identifiers will help you establish a launchpad for the right conversations to gather your resources.

Key Early Risk Identifiers

  1. Credentials of Your Borrower
    The approval or pre-approval stages are a great indicator of future risk or liability. This can be true of loan sanction or premium renewal scenarios. To gauge a client’s credit risk can be assessed initially by looking closely at their credit history and their balance sheets. That being said, these signs are very subtle and can be easy to miss, buried beneath heaps of paperwork, in the grand scheme of things. 
  2. Early Payment Defaults
    A payment default or a bounced cheque early on in the repayment cycle is usually not a good sign. The degree of urgency, amount of aggression, and the intimidation tactics used may be addressed later and have to undergo a process of fine-tuning, but this signal should not be ignored. 
  3. Customer Response
    The behaviors and the actions of your customers are a good indicator of what their credit situation is like, after all, actions do speak louder than words. Telltale signs include ignoring calls, being evasive of their availability, or in extreme cases, they are verbally abusive towards your representatives. Other red flags include repeated calls for extensions in quick succession. Getting their attention is also difficult and you might have to consider alternative forms of communication, not in their preferred way of communication, like a targeted ad to make them respond to you.

Experience makes you better at recognizing a sign of early risk in credit, but this takes a long time to master. Also, humans are prone to make mistakes. Instinct may guide you incorrectly. So, your organization cannot rely solely on human instinct and experience. Similarly, technology cannot fully rely on either – they can falsely identify cases and flag them. We have seen that happening. Timely intervention and a well-adjusted course of action could mean the difference between on-track payments or a non-performing portfolio.

Therefore, you must enable your servicing teams to respond effectively to early warning signs. This is the area of expertise for ATS. We combine significant human experience and state-of-the-art technical skills to help your company spot early signs of risk in credit to minimize losses and capitalize on profit.  

We’ve worked with numerous clients over the years to help them manage their credit risks successfully. We can work together to customize your solutions based on the needs of your firm and the demographic of your clients.

If you’re interested in learning more about our Risk Management services, please contact us and our Sales team will get back to you. 

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