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Implementing Active Credit Portfolio Management
By Harry Pretorius, Director of Risk, SAS Institute Africa and Middle East
Credit risk management has always been all about minimising risk, cutting losses down to an acceptable level. In many instances it is something that is done begrudgingly, because it needs to be done, rather than something that is embraced for the benefits it can bring to an organisation.
However, managing your credit risk does not have to be a process that seems to be little more than a way of throwing money down the drain. On the contrary, a different approach to credit risk management can see your organisation enhancing its performance and competing more effectively. This approach has become known as Active Credit Portfolio Management, or APM, and it could be that one thing that tips the scales in your favour, and helps you gain that all important edge over your competitors.
Managing Risk
The combined pressures of convergence and regulatory compliance, not to mention the recently passed National Credit Act, mean that the credit landscape has changed dramatically in recent years. With this in mind, it is important to remember that because of these changes, traditional methods of managing credit risk may no longer be applicable, and that if you are to keep up with the competition, or outperform them, you need to embrace tools which can help in managing risk, whether this be new technology such as credit risk management software and analytical capability, and new methodology when it comes to risk and lending.
The straight dope on APM
The basis of APM is an analytical framework that allows for the evaluation of each asset based on a predefined level, and whether the asset in question is above or below this rate. This allows you to determine whether an investment creates value (is above the rate) or does not (is below the rate). APM is therefore a technique, based on this framework, which enables risk managers to measure return against credit risk, and thereby refine portfolios to match credit risk.
This technique can enable you to gain portfolios that have a significantly higher income and less risk, so you can achieve an optimised risk and return profile. APM is not about eliminating risk and credit losses, but rather it is about managing your risk portfolios more effectively. Fringe benefits of this include optimised allocation of and return on capital, and greater insight into potential and existing risk.
Sustained approach to APM
It is necessary to keep in mind that APM is not a once off exercise, but needs to become an ongoing and continuous process. That said however, if APM is effectively implemented there are several long term business benefits that can be leveraged through the implementation of such a system.
First off, APM enables evaluation and appraisal of the performance of various assets, as well as each of these assets' risk and return profiles. This then leads to the ability for management to make well informed strategic decisions, based on the information on credit risk gained, and thereby maximising potential returns. APM also allows banks to develop effective strategy, and from that compete more effectively due to superior knowledge of credit portfolio, opening up opportunities for banks to expand market share.
To end
At its heart, APM is a new way of making decisions, embracing the old adage that knowledge is power, and leveraging this knowledge to make well-informed, fact base decisions. In order to remain competitive today and in the future in a constantly changing and challenging environment, it is vital to adopt and embrace improved techniques and technology. Put the processes and technology in place today, and reap the rewards tomorrow.
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