Page 32 - Risk Management Bulletin Jan- Mar 2022

RMAI BULLETIN JANUARY - MARCH 2022

creditworthiness of new and returning customers helps prudent credit lines. In fact, a data-driven assessment
a firm extend the appropriate amount of credit to of customers’ creditworthiness should be the basis of
them and reduces the risk of late payments or defaults. credit decisions. Companies need to design and deploy
Credit Risk Models that predict the probability of
The following are the key components of credit default of their customers.
risk management.
These credit risk models arrive at Risk Scores for each
KYC/KYB and Streamlined Customer
customer based on the transaction history, financial
Onboarding Process: Know Your Customer (KYC)/
statements, statutory compliance, litigation data, social
Know your Business (KYB) is a step in due diligence and
media pro?le of promoters and management,
risk mitigation that helps identify and verify the
ownership pattern, trade references, related parties,
legitimacy of counterparties to help build trust and
and customer and employee feedback. Automated
avert identity frauds, money laundering, tax frauds,
Risk Management and Monitoring platforms offered by
and other financial crimes. A proper KYC/ KYB is
specialized companies can be used for this purpose.
possible only if accurate and current information is
gathered and verified during the onboarding process.
Credit Limit Setting Model: Companies also deploy
The data points can include details about business
credit limit setting models to set credit limits
registration, tax ID, ownership structure, related
systematically and prudently. These models
parties, and management.
recommend actionable credit limits for customers,
distributors, and dealers by calibrating their Risk Scores
The submitted data and documents need to be
with the companies’ credit risk appetite.
validated through various government databases. If a
customer has a Legal Entity Identifier (LEI) code issued
Credit Monitoring and Periodic Review: In the
by the Global Legal Entity Identifier Foundation (GLEIF)
present volatile environment, a one-time risk
and LEIL, its Local Operating Unit in India, the
assessment is not adequate; the risk of counterparties
registration and ownership of the company can be
requires continuous monitoring, as risk profiles can
validated easily. The identity risk pertaining to a
change rapidly. A low-credit-risk entity two years ago
counterparty can be mitigated by insisting that it
may carry one of the highest credit risks today. A large
obtains a LEI before a transaction can take place.
customer from a year ago could be on the verge of
bankruptcy. There needs to be an Early Warning
Designing and Deploying a Robust Credit
System (EWS) that can collate key risk indicators on a
Scoring Model: Traditionally, sales executives have
near real-time basis from various data sources,
exerted a major influence on credit limits and
including statutory compliance and financial filings,
customer onboarding decisions, depending on their
news, and media, to provide a dynamic view of a
own impression of the client. It can often result in
company’s risk profile. A clear understanding of the
having high-risk customers who enjoy higher-than-
sector in which the counterparty operates is also
essential. In particular, the potential short-term
challenges need to be identified, as these could impact
the counterparty’s performance and its ability to meet
its financial obligations.
A Proper Credit Workflow and Credit Limit
Approval Protocol: Now, more than ever before,
credit decisions have to be made faster, as customers
are demanding shorter processing times. However, the
number of checks required to be undertaken on a
business has only grown. In the absence of
standardised workflows, there could be miscommuni-

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