How A Risk Assessment Helps Lending Institutions Increase Profits And Mitigate Loss
The act of lending money to consumers is a type of business that is thousands of years old, and while a lot has changed with the help of technology, institutions are continually looking for ways to reduce risk and increase profits. Despite the importance of proper risk assessment in ensuring long-term viability, organizations of all sizes struggle to extrapolate data and develop models that allow them to mitigate the chances of default. An outside consultant will bring an external view and help a company make procedural changes that will keep them profitable and financially strong well into the future.
One of the first steps is examining a company’s investment portfolio, which is a collection of all the various loans that are currently active. Each customer is assigned a rating that predicts the likelihood of default based on their past payment history and credit rating. A consultant will review a portfolio and determine if a company needs to limit the number of high-risk loans it approves or if they are in a position where they could capitalize on subprime lending products.
Most credit applications are initially reviewed by a software program that looks at key indicators to determine if a consumer meets a company’s minimum threshold for approval. Next, it will enter the underwriting phase where a person will review the information again and determine if any anomalies exist and whether or not to approve the credit. It is crucial to have a streamlined underwriting process to ensure continuity and reduce the chances of error that may cost a company hundreds of thousands of dollars in the future.
No matter what checks and balances a company implements, there will be some borrowers that either pay their loan late or default on repayment altogether. Collections modeling reduces the impact of these events by providing a company with a framework that determines if consumers are likely to repay. With this information, a company may decide if an account should be sold and at what price.
While there is no way to reduce 100% of the risk associated with lending money, there are ways to mitigate its effects. Cane Bay Partners is a leading provider of consulting services to the financial sector and has helped hundreds of lending institutions maintain a profitable portfolio. Visit their site to learn more and take the first step in gaining peace of mind.