Credit Risk Management Resources

Whether you’re an established business or a startup, risk mitigation is a constant concern. Risk-taking is a fundamental aspect of banking, so it’s no surprise that banks have always practised risk management – it’s essential for their survival. After all, risks have been inherent in the banking system ever since the first Sumerian merchants borrowed barley from a temple thousands of years ago. Without credit risk management in banks, the industry wouldn’t have lasted as long. The main shift over time has been the need for more advanced strategies for credit risk management in the 21st century. As the popular saying goes, ‘Modern problems require modern solutions.’ Credit risk management is a significant part of a financial institution’s overall risk management strategy. However, risk mitigations aren’t just about preparing for financial downturns. It’s an ongoing process. Effective risk mitigation strategies encompass all business facets, from operations to human resources.

Loans play a vital role in any economy. It can act as an economic stimulus by allowing transfer of money between lenders and borrowers, which enables businesses to invest, expand, and generate employment. Furthermore, loans are a major source of revenue for banks. While lending is a vital aspect of banking, financial institutions also bear the responsibility of mitigating potential risks. Therefore, they need to check the creditworthiness of the borrower. For financial institutions, it’s part of having good credit risk management.

In an increasingly competitive and uncertain economic climate, businesses must be vigilant in managing credit risk associated with their customers. Effective credit risk management is essential to protect a company from the detrimental effects of customer insolvency, which can lead to significant financial losses and negatively impact cash flow. This article aims to discuss in-depth strategies and tools businesses can implement to minimise credit risk, mitigate potential consequences of customer insolvency, and ultimately safeguard their financial stability.

Credit risk management is a cornerstone of any financial institution’s operation. Central to this task are two key techniques: credit scoring and risk assessment. A blend of data analysis, financial intuition, and predictive modelling, these methods help banks decide who to lend to, how much, and under what terms. But what exactly are these techniques? And how are they applied in the real world?

One of the collection tools used by the Australian Taxation Office (ATO) is to issue a Director Penalty Notice (DPN). The goal is to recover overdue business tax debt personally from current or former company directors. Once a non-lockdown DPN is issued, a director has 21 days to act before they become personally liable. Options typically are to pay the debt or appoint an insolvency or restructuring practitioner. This short timeframe often leads to insolvencies or small business restructuring seemingly coming ‘out of the blue’ to creditors. In this article we cover what a DPN is, ATO DPN rates, what does a DPN mean for creditors and risk management strategies (including accessing vital ATO business tax default data).

The Australian Securities & Investments Commission (ASIC) have released their ‘Review of small business restructuring process: 2022–24’. The review was designed to examine this insolvency regime to see if it is delivering on its objective to reduce the complexity and costs involved in insolvency processes to help small businesses to survive. Here Access Intell summarises the key statistics relevant to creditors.