Managing credit risk is a process that all credit companies and bank have to engage in to reduce the losses from when the risk does not pay off. When a company provides a loan to a customer, there is always a risk of them not paying up, thus resulting in net losses to the organization. If I were to design credit policies for high-risk customers, I would have made said policies easier to account for such risks. There are several strategies that could be implemented, namely risk-based pricing, loan agreements, and tightening procedures (Wilson et al., 2020). Risk-based pricing suggests giving services to risky clients at a higher interest rate to compensate for their potential inability to pay (Wilson et al., 2020). Loan agreements allow for structuring the loans in a way that mitigates the risk, either by utilizing the person’s property or some other kind of valuables as insurance (Wilson et al., 2020). Finally, tightening procedures mitigate the risk by limiting the sums available to untrustworthy customers.
Monitoring of collections in banks is typically delegated to automatic banking systems. With high-risk customers, however, there may be potential circumstances that a machine would not be able to handle, thus requiring a personal touch of a dedicated credit specialist to solve (Wilson et al., 2020). They may work together with the client to come up with the best payment plan, that would ensure maximum comfort to banks and customers alike. Companies extend credit to potentially dangerous customers because of several reasons: high risk – high reward, enlarging the customer base, and philanthropic reasons (Wilson et al., 2020). Customers charged with higher interest rates will bring the organization more money if they come through with their payments. In addition, customers do not always stay in the high-risk category, and lending a loan when one needs it the most will net a loyal customer. Finally, some individuals require credit to start a new life, and credit organizations are some of the very few to help out with the endeavor.
References
Wilson, J. F., Wong, N. D., & Toms, S. (Eds.). (2020). Banking and finance: Case studies in the development of the UK financial sector. Routledge.