One of today’s numerous issues is balancing the need to lower company credit risk while not being excessively cautious and missing out on new opportunities. Emerging social and economic issues resulting from the COVID-19 epidemic highlighted the significance of managing credit risk cautiously in these uncertain times.
Aside from using credit bureaus to assess credit, many firms are leveraging the power of data to create better, fairer, and more accurate lending decisions through KYC, credit scoring models, and monitoring services.
According to the Monetary Authority of Singapore (MAS), credit risk is the risk that occurs as a result of an obligor’s inability to fulfill contractual obligations.
Good corporate credit risk management results in practical benefits for firms, such as reduced revenue losses, increased cash flow, and the identification of prospective possibilities. Thus, it is not surprising that organizations are looking for solutions to assist them in better analyzing and reducing potential risks.
Here are some strategies for adequately managing a company’s credit risk exposure with respect to the Singapore Banking System.
Know Your Customer
KYC is vital in validating the identity and profile of clients before engaging in any professional engagement since the known risk is preferable to the unknown risk. In addition, KYC is required in industries such as finance, where tight safeguards are in place to prevent money laundering, fraud, and other illegal activity.
More crucially, if organizations can recognize risk indications or red flags during the onboarding process, they can set favorable lending terms in advance.
Modernized digital KYC solutions can assist in automating the verification process, integrating it with an organization’s own systems, and streamlining the customer onboarding process. For example, a renowned financial institution in Singapore specializes in auto finance and leasing and processes over 1,000 new financing applications per month.
Use credit scores and ratings to determine creditworthiness
Banks and other financial organizations generally rely on commercial credit bureau reports. Alternative lenders outside of the banking system, on the other hand, can use resources from a non-banking bureau to help them analyze credit risk.
An SME Network Score predicts a company’s ability to pay for new enterprises or start-ups with minimal credit history by integrating standard data and analytics with alternative data and machine learning. In addition, it tackles the issue of thin-file firms’ need for rating models by taking into account specific business information such as payments and transactions, search and inquiry data, network characteristics and payment performance, and more.
Meanwhile, DP Credit Rating measures the likelihood of default among Singapore companies and can serve as an early warning signal for the credit grantor or investor. It can also help with credit decision-making and identifying acceptable credit conditions. Companies can also use the rating to demonstrate their trustworthiness to suppliers and to negotiate credit terms.
You can better limit your risk exposure by establishing lending terms based on a lender’s risk assessment, such as a greater upfront payment or cash-on-delivery (COD) for high-risk enterprises.
Monitor key indicators
In today’s environment, all businesses must proactively monitor their portfolio, particularly if customers are at risk of delaying payments and exhibiting early signs of credit distress, such as a history of negative listing by other lenders, ongoing litigation suits, and less-than-desirable payment behavior.
- Here are some questions to ask as part of your continuous due diligence:
- What is their financial situation? How are their key financial parameters, such as profit margin, debt-to-equity ratio, and liquidity, performing?
- Is the corporation involved in any legal proceedings?
- How well do they repay their debts? Are their Days Turned Cash (DTC) higher than the industry standard? Is their DTC trending upward?
- How much credit exposure do they have?
- Has the company been blacklisted before?
Organizations may better identify potential consumers, automate complicated choices, and reduce risk by possessing crucial information such as a business profile, litigation history, audited financial records, and property data.
Portfolio Monitoring services enable organizations to receive fast information about important customer and supplier events, allowing them to respond and act quickly. Filings for bankruptcy, originating summons, changes in business name and information, changes in payment records, and other events are examples of these warnings.
Leverage quality data and insights
Business executives and credit managers understand how difficult it can be to make confident lending and approval choices, especially in an increasingly complicated and uncertain world.
Because of technological developments to assimilate fresh data and complex analytics, credit risk assessment is different from what it formerly was. As a result, businesses may create more strong risk profiles, allowing more SMEs to access funding and improving overall customer experience.
