In the lending business it is important to determine the kind of risk you should take in return for higher yields.
Are you willing to take higher risks in return for an higher IRR? Or is your aim to ensure that your principal is safe with a decent IRR? Whatever your decision, as a credit manager or Financial Engineer incharge of creating financial products you should have a clear understanding of the risk that you are willing to take to achieve a desired return.
Before we embark on the approach to risk it is appropriate to determine the types of risk and the way it can affect your Product Portfolio.
- CAPITAL RISK - The most obvious risk is that your loan customer might not be able to service the interest nor pay-up the Principal
- SHORTFALL RISK - The return on your loan portfolio might not match your expected returns
- INTEREST RATE RISKS - The changes in the Central Bank's Prime lending rates might affect your interest spreads
While risks due to fluctuating interest rates can be mitigated with enetering into floating rate contracts with the customers the other two risks depend on the attitude of the customer during the period of sevicing the loan. The attitude can to a large extent be influenced by socio-economic factors. Though it is difficult to determine the attitude of an indivdual accurately we can identify the influencers and assign a risk score based on the individuals demographic data.
AnyBank CRM and AnyBank CAPS, new age Fintech products for Customer Acquisition and Profiling has a BPM driven workflow to determine the risk of a prospect. The extensive set of rules in the respository allow it to check the attributes of the Prospect, look up databases and run internal algorithms to arrive at a risk score thereby allowing underwriters to arrive at credit decision in line with the risk profile.