Credit risks and ways to reduce them
What are the credit risks faced by banks?
There are many credit risks facing banks and banks in the business world, which the bank management must take the necessary precautions to reduce these risks and their impact. Among the most important of these risks are the following:
- Risks of changing the laws regulating the amount and quality of credit: here these laws and legislation may change; to give the banks room to expand or narrow more in the process of granting credit, the banks impose more stringent rates such as the ratio of credit to the total deposits in the bank or other laws and legislations.
- Industry risks practiced by the borrower: Here the risks of the industry practiced by the borrower vary from one industry to another, for example in the computer and software industry, there is a very important risk which is obsolescence and the emergence of new generations of computers and software. And also in the agricultural sector, where the harsh climatic conditions and industries in general, and there are also risks related to the lack of raw materials for production or a change in the patterns and tastes of consumers.
- Risks of the inexperience of credit officers: The inexperience of the staff may lead to fatal risks in the process of granting credit, the lack of experience in the ability to inquire about the customer and his financial reputation and perform the necessary analyzes of the financial statements of the customer (the borrower), leads to an increase in the bad loans ratio, even If the bank took the necessary guarantees. Accordingly, the bank must hold specialized training courses related to increasing their skills, knowledge, and abilities to perform the work optimally.
- Economic conditions risks: This type of risk cannot be controlled, but the bank’s losses can be reduced by taking the necessary reserves; to avoid problems when conducting the necessary economic analyzes and following scientific methods to predict what the economic conditions will be in the future.
- Exchange rate fluctuation risk: This type of risk appears only when there is a case of granting credit to a customer abroad, that the loan was made in the currency of the country in which the borrower is located. Loan; As the purchasing value of the money you obtain will be less, but if the loan is in a hard currency such as dollars, and then a decrease in dollar prices occurred after the borrower obtained the loan; The foreign borrower must pay more money than the currency of his country; So that he can repay the loan.
- Risks of fluctuating interest rates: the increase in interest rates on loans leads to a decrease in customers’ demand for loans; Because the cost of the loan becomes larger and will become high, and in some cases, it may be higher than the return expected to be obtained by the borrower from his investment project that he finances from the loan. Therefore, when the level of interest rates is reduced; this will affect the number of loans required from banks; which affects the profits of the bank and vice versa.
- Risks of the inexperience of the staff of the lending company: the absence of expert and qualified staff who have sufficient and good experience with the borrower; It can lead to inefficient use of borrowed funds.
Means of limiting credit risk:
- There are many means and measures that banks should take to avoid various credit risks, according to the type of risks that we will face. The lending company, the bank must inquire about the loan applicant. It asks the customer for a biography of each employee, as the bank has the right to ask about the fate of the money that it will deliver to that customer and where it will go.
- The bank must take all necessary measures and precautions related to the risks it will face, to remain within the safety zone, and stay away from all risks that the bank may be exposed to, through the customer or through external factors.
- The appropriate, efficient, and highly experienced credit officer must be employed, and he must be subject to training courses that enable him to work in this field without falling into risks and problems. The credit officer must also be fully aware of all the circumstances surrounding customers; to encourage or deter them from taking credit.
- The bank shall take the necessary measures in connection with the exchange rates, and loans shall be granted in hard currency; So that the bank does not fall into the maze of low-interest rates or lose money.