Credit risk management: a forward thinking approach
Credit crunch, double dip recession and on-going market volatility mean challenging times. But what does this mean for companies that lend to consumers? Economic change drives consumer and business behaviour yet historically the performance of the economy has not been included in credit scoring models. In relatively stable market conditions that’s workable. But with today’s sluggish economic climate putting additional pressure on consumers and their debt obligations, there is increased internal and regulatory pressure on organisations to improve efficiencies and reduce losses.
In the past, credit scoring relied upon the assumption that the past predicts the future. Today, with unprecedented levels of rapid economic change, scores would be more useful if they were based upon future conditions. If decision-making was underpinned by a more forward-thinking approach that links credit performance of individuals to the wider economy, businesses could significantly reduce their risk exposure, as well as demonstrate responsible lending to industry regulators.