Credit management

Adeel Nasir
Lecturer (Commerce)
Punjab University Jhelum Campus

Course Objectives
1. Environment and risks
2. Relationships between risk components
3. Decision makers and risk management
4. Systems engineering and risk management
5. Risks in simple, dynamic and systemic contexts
6. Insurance and legal implications for risk management
7. Defining context including organizational and behavioral
considerations
8. Relationship between environment and risk identification and
treatment
9. Generic and specific causes of risk
10. Qualitative and quantitative risk management techniques
11. Causation and mitigation techniques

Risk Management
Risk management is a key process often aligned

with either project management or systems

engineering. On the surface it appears to be a
relatively simple process, but achieving effective
risk management is often illusive.

 Concept of Risk
Understand the concept of risk management and

how to use a variety of derivative financial

strategies to manage risk. Learn how hedging can
positively affect an organizations risk exposure.
Risk Goals
1. Formulate and implement risk management

strategies that are consistent with corporate goals.

2. Exploit hedging as a positive risk management
tactic
3. Reduce the likelihood of financial distress
4. Use your organization's special skills and
knowledge to optimize risk exposure

The word Credit

As a financial term, used in such terms as credit

card, it refers to the granting of a loan and the

creation of debt.
Any movement of financial capital is normally
quite dependent on credit, which in turn is
dependent on the reputation or creditworthiness
of the entity which takes responsibility for the
funds
In commercial trade credit is used to refer to the
approval of delay payment for the goods
purchased

The word Credit

A privilege granted for the purpose of extending

time to make payment on a debt

The money a lender extends to a buyer for a
commitment to repay the loan within a certain
timeframe.
You are granted credit when an organization or
individual makes a sum available for you to
borrow

Main Types of Credit

Home loans, or mortgages , and personal or shop

loans are linked to a specific item or items for

example, anew kitchen, or a house
Revolving credit on payment cards can give you
access to a fixed amount of money that you can
spend as you wish, in a wide range of retailers
and other outlets

Repayment
Loans are normally repaid in regular installments

over an agreed period of time

Mortgages, or home loans, can be repaid in variable

installments but most personal loans specify fixed

repayments of approximately equal amounts
Revolving credit is a dynamic nature of loan,

which meets the regular need of credit

Whatever type of loan you choose, be certain to
make your repayments on time, or you can face
financial penalties

Revolving Credit
Revolving credit means that you always have

access to the amount of your line of credit that

remains unspent. And every time you pay off
some of the outstanding amount, that proportion
of your credit limit becomes available for you to
spend again.
You have a credit limit of Rs 1,000, spend Rs 300

and repay Rs 100, you have Rs 800 available to

spend.

Interest
It is cost of lending

In order to cover the lending risk and to make a

profit on their money, lenders generally charge

interest on loans and revolving credit
Common ways of charging of interest
Simple interest
Compound interest

Interest
Simple interest
if you borrow Rs 100 and interest is payable at an

annual rate of ten per cent, the total cost is Rs 110.

Compound interest
if you owe Rs 100 and are charged ten per cent

compound interest each year, at the end of year

one you will owe Rs 110. In year two, the lender will
charge ten per cent of this sum and add it to the
outstanding amount, so you will owe Rs 121, and so
on

Interest
Interest may be compounded after any period

e.g. a day, a week, a month and so on

With fixed repayment loans, the amount of
interest is worked out in advance and added in to
the repayments.
There is often a penalty if you want to repay the
outstanding amount earlier than agreed
With revolving credit, you can repay as much or
as little as you want, at any point.
You can often avoid paying any interest at all if you

repay the total amount you have borrowed on the

date when the first repayment is due

Credit Score
A credit score is a numerical expression based on

a statistical analysis of a person's credit files, to

represent the creditworthiness of that person,
which is the perceived likelihood that the person
will pay debts in a timely manner
A credit score is primarily based on credit report
information typically sourced from credit bureaus /
credit reference agencies

Credit Score
Lenders, such as banks and credit card

companies, use credit scores to evaluate the

potential risk posed by lending money to
consumers and to mitigate losses due to bad
debt.
Lenders use credit scores to determine who

qualifies for a loan, at what interest rate, and what

credit limits

Credit score
The use of credit or identity scoring prior to

authorizing access or granting credit is an

implementation of a trusted system.
Credit scoring is not limited to banks. Other

organizations employ the same techniques, such as

mobile phone companies
insurance companies
Employers
government departments

Credit scoring also has a lot of overlap with data

mining, which uses many similar techniques.

Identity Score
An identity score is a system for tagging and verifying the

legitimacy of an individuals public identity

System which reduce the extent of frauds and misconduct

Identity score incorporate the large set of consumer data

that ensure the persons legitimacy

Identity score components can include (but are not limited
to)
personal Identifiers
public records
Internet data

government records
corporate data
predicted behavior patterns based on empirical data
self assessed behavior patterns
credit records

Credit Bureau or Credit Reference

Agency
A credit bureau(U.S.) or credit reference

agency(UK) is a company that provides consumer

credit information on individual borrowers
This helps lenders assess credit worthiness, the

ability to pay back a loan, and can affect the interest

rate applied to loans

Credit Bureau or Credit Reference

Agency
Credit furnishers
Credit furnishers are business, utlilities, debt

collection agencies, public institutions and the

courts, who provide personal financial data on
individuals and businesses to credit bureaus
Data furnishers report the experience with the consumer or

business to the credit bureaus

Credit Bureau or Credit Reference

Agency
he data provided by the data furnishers as well as

collected by the bureaus are then aggregated into

the credit bureaus data repository or files.
The resulting information is made available on
request to contributing companies for the
purposes of credit assessment and credit scoring
these credit scores tend to be mechanistic

CREDIT HISTORY
Credit history or credit report is, in many

countries, a record of an individual's or company's

past borrowing and repaying, including
information about late payments and bankruptcy.
The term "credit reputation" can either be used

synonymous to credit history or to credit score

CREDIT HISTORY
Customer fills out the application for credit from a

bank, credit card company or store

Their information is forwarded to credit bureau

Lender use this information to assess the credit

worthiness of the customer

Factors determining individual credit

ratings
Payment records

Control of debt
Responsibility and stability
Credit inquiries

Understanding credit reports and

scores
The consequence of a negative credit rating is

typically a reduction in the likelihood that a lender

will approve an application for credit under
favorable terms
Interest rates on loans are significantly affected
by credit history
higher the credit rating, the lower the interest while

the lower the credit rating, the higher the interest.

International issues
Credit history is typically local to one country.

Even within the same credit card network

information is not shared for different countries.
a person who has been using Visa credit cards

issued by banks in China or Canada for many years

who moves to the United States and immediately
applies for a Visa will not be approved because of
lack of credit history.

International issues
An immigrant must establish a credit history from

scratch in the new country, which can take years.

New immigrants are forced to seek loans from
irregular channels, which can create social
problems.
Adverse credit history also called sub-prime credit
history, non-status credit history, impaired credit
history, poor credit history, and bad credit history,
is a negative credit rating.
A negative credit rating is often considered
undesirable to lenders and other extenders of
credit for the purposes of loaning money or
capital.

Adverse Credit
When creditors report an excessive number of

late payments, or trouble with collecting

payments, a "hit" on the score is suffered.
Similarly, when adverse judgments and collection
agency activity are reported, even bigger "hits on
this score are suffered. Repeated hits can lower
the score and trigger what is called a negative
credit rating or adverse credit history.

CREDIT RATING
A credit rating assesses the credit worthiness of

an individual, corporation, or even a country.

Credit ratings are calculated from financial history
and current assets and liabilities. Typically, a
credit rating tells a lender or investor the
probability of the subject being able to pay back a
loan.
A poor credit rating indicates a high risk of
defaulting on a loan, and thus leads to high
interest rates or the refusal of a loan by the
creditor

Personal credit ratings

In countries such as the United States, an individual's

credit history is compiled and maintained by companies

called credit bureaus.
In the United States, credit worthiness is usually
determined through a statistical analysis of the available
credit data
An individual's credit score, along with his or her credit
report, affects his or her ability to borrow money through
financial institutions such as banks.
The factors which may influence a person's credit rating
are

ability to pay a loan

interest
amount of credit used
saving patterns
spending patterns
debt

Corporate credit ratings

The credit rating of a corporation is a financial

indicator to potential investors of debt securities

such as bonds.
These are assigned by credit rating agencies
such as Standard & Poor's or Fitch Ratings and
have letter designations such as AAA, B, and CC

Sovereign credit ratings

A sovereign credit rating is the credit rating of a

sovereign entity, i.e. a country. The sovereign

credit rating indicates the risk level of the
investing environment of a country and is used by
investors looking to invest abroad. It takes
political risk into account.

Short term rating

A short term rating is a probability factor of an

individual going into default within a year. This is

in contrast to long-term rating which is evaluated
over a long timeframe.

Credit rating agencies

Credit scores for individuals are assigned by credit

bureaus (US; UK: credit reference agencies).

Credit ratings for corporations and sovereign debt are
assigned by credit rating agencies.
In the United States, the main credit bureaus are

Experian, Equifax, and Trans Union. A relatively new

credit bureau in the US is Innovis.
In Pakistan there is CIB (Credit Information Bureau)
In the United Kingdom, the main credit reference
agencies for individuals are Experian, Equifax, and Call
credit.
In Canada, the main credit bureaus for individuals are

Equifax, Trans Unionand Northern Credit Bureaus/

Experian.

Credit Information Bureau & State

Bank of Pakistan
The bureau is a repository of credit information of

borrowers. The member lending institutions provide

credit data (personal and loan information) of their
borrowers to the bureau which consolidates, updates,
and stores the same and provides this information to
its members FIs in the form of credit worthiness
reports (CWR).
The Credit Information Bureau also aid financial
institutions to make well informed credit decisions in
timely manners minimizing the credit risk.
The Credit Information Bureau (CIB) isa public sector
credit bureau of Pakistan. It was established in 1992
by the State Bank of Pakistan (SBP) under Section
25(A)of Banking Companies Ordinance-1962.

 The CIB is a part of Banking Surveillance Department of the

State Bank of Pakistan. All fund and non-fund base credit

facilities irrespective of any outstanding amount are being
reported to the CIB. Reporting to the CIB is mandatory for all
member financial institutions (FIs).
There are three privately owned credit bureaus in Pakistan:
Data check, News-VIS Credit Information Systems and ICIL/ Pak
Biz Info.
The CIB gets information on borrowers from all the member
financial institutions.
All Banks, Development Financial Institutions (DFIs), Non-Bank
Financial Institutions (NBFIs), Modarabas and Micro Finance
Banks operating in Pakistan are members of the CIB. Only the
financial institutions operating in Pakistan are entitled to become
member of the CIB.
The membership with CIB, as per instructions of SBP and SECP,
is mandatory for all Banks/DFIs and NBFCs respectively. No
financial institution can access the CIB database without having
its membership.