Today's high rate of delinquency and default has forced lenders to examine their business practices to determine the best path toward future profitability. Lenders continuing to follow a failed credit risk management strategy will, unfortunately, continue repeating the same expensive mistakes.
Short-Term Fixes Can Cause Long-Term Problems
Lenders must make changes to their credit risk management strategy that balances both current and future needs within the credit landscape. Simply plugging leaks in a credit portfolio could damage the financial foundation of a lender, which will ultimately weaken the lender's position in the credit market.
For instance, say a credit card company raises interest rates for each cardholder in response to losses from those who defaulted.
Although this may bring in some money for the short-term, it could lead to disaster in the long-term as customers who have good credit will typically respond by opening accounts with other credit card providers, choosing to close the expensive account.
Cardholders with poor credit may complain about the increased interest rate, but their credit situation will keep them from getting a credit card from another provider. This results in an unbalanced lending portfolio with a larger ratio of high-risk borrowers.
Developing A Credit Risk Management Strategy
Today's lenders can benefit from new loan generation software that provides sophisticated tools to minimize risk. Having the ability to categorize and analyze a loan portfolio can help a lender create a profitable credit risk management strategy. By developing a comprehensive risk management plan, lenders protect themselves without affecting their best customers.