Credit Risk ManagementEnhancing Your Bottom Line,Ebrahim Shabudin Managing Director Deloitte & Touche LLP,The AFP 23rd Annual Conference New Orleans November 3-6, 2002,Credit Background,Thorough identification and accurate measurement of credit risk, supported by strong risk management can help improve the bottom line .An uncertain and volatile economic environment significantly impacts this ability .The desire to grow and turn in outstanding results has a tendency to put pressure on the checks and balances within businesses,Value Proposition,Credit plays a critical role in “selling” products and services Expands revenue opportunities with creditworthy, incremental customers Utilizes innovative structures to support business relationships Effective credit risk management limits credit losses and provides stable cash flows and earnings Marketplace rewards companies exhibiting earnings and cash flow stability with higher P/E multiples Marketplace penalizes credit induced volatility and “surprises” Raises questions about quality of management,Corporate Credit Risk,Companies are exposed to significant levels of credit risk emanating from different sources Accounts Receivables Other Notes Receivables Buyer and Franchise Financing With Recourse Financing Project Finance Structured Transactions Leases with Recourse Derivatives Exposures FX, Interest Rate Risk, Commodities etc. Collateral Risk Parent or Third Party Guarantees Commercial and Standby Letters of Credit Note also that Critical Suppliers to the company may pose specific credit risk,DSO Impact an example,Credit as a Facilitator,Credit risk management is important Credit is a facilitator of business growth and performance High business margins tend to attract lower quality clients and therefore higher risk profile to manage Clients (buyers) may be concentrated in selected industries and provide limited portfolio diversification opportunity Poor credit risk management resulting in negative impact to bottom-line is heavily penalized by markets,Credit Strategy & Risk Tolerance,Specific Quantifiable Objectives Management Review Methodology,Credit Strategy Statement and Risk Tolerance Coordination with Business Plan,The business strategies and objectives drive the establishment of credit policies and procedures. Measurement and reporting as well as the use of current technologies enhance credit decision-making and improve risk management. The entire process is continually re-evaluated and improved.,Credit Risk Areas to Consider,Credit Policy Credit Approval Authority Limit Setting Pricing Terms and Conditions Documentation: Contracts and Covenants Collateral and Security Collections, Delinquencies and Workouts,Exposure Management Aggregation Control Periodic Account Reviews Payments/Aging Credit Condition Compliance with Covenants, Terms Technology/Reports Transactions/ Bookings Risk-adjusted Return,Sales Channels Risk Strategy Underwriting Standards Credit Application Analysis Business/ Industry Financial Credit Credit Scoring and Ratings,Origination/ Assessment,Administration,Monitoring/ Control,Risk Management,Portfolio Management Concentration Diversification Allowance for Bad Debts Risk Mitigation Objectives Type of Exposure Instruments or Methods,Value Creation,Business Performance Measures,Organizations need a rigorous set of measures to support continuous improvement,Performance-based management utilizes metrics that measure actual performance against predetermined thresholds. The thresholds are established taking into account the organizations strategy, operating environment and process controls.,The measures drive value creation and should support problem identification and correction.,Business Strategy Systems Operations Finance,Performance Management,Sales channels,Contracts & Documentation,Credit analysis,Credit limit,Pricing & terms,Credit Analysis,Credit Decisions,Collections,CREDIT POLICY,Collateral acceptance,Portfolio management,Financial analysis,Disposal / Risk mitigation,Collateral management,Customer management,Exposure measurement,Management reporting,Exposure aggregation,Recoveries,Credit scoring,Risk rating,RISK MANAGEMENT,Credit Risk Managements Inter-related Activities,Compliance,Origination,Reporting,Transactions,Credit Policies & Procedures,Analysis & Risk Management,Governance, Control and Implementation,Measurement Methodologies,Technology & Data Integrity,Credit Strategy & Risk Tolerance,A complete and coherent risk management framework contains the following elements,Credit Risk Management,A New Paradigm,A new business paradigm had evolved: causing a lack of reliance on good fundamental analysis The idea that stock market values would continue to go up indefinitely Increasingly competitive, complex and volatile market place Higher than expected actual debt burdens Extensive reliance on unrealistic future cash flows Failures in corporate governance Questionable personal and corporate ethics,Implications for Corporate Governance,