Lessons Learned for Credit Assessment

Every bank has very similar challenges, too many borrowers and not enough money. Until now. Globally, more banks than ever are reporting surplus accumulations of capital to lend.

My name is Ted Martynov and I’ve ran credit & lending companies for many years. I was fortunate to do this in very diverse economies like Ukraine and Myanmar and now in Nigeria. I’ve spoken with hundreds of traditional & digital lenders in Africa in the last two years. They all have done a fairly good job of assessing borrowers, with some significant variations & general challenges  This brought forth the need to put together a list of best practices in the lending business for credit assessment:

1. Risk management is not about minimizing but optimizing
   Many risk managers operate from the basis that zero risk lending is preferred. While partly true, balancing risk with a great product could give way more benefits. Setting up optimal and threshold risk targets gives a better risk strategy. Working closer to optimal risk or a varied risk appetite gives you the room to increase borrower acceptance rates and recover business losses. The rate of credit given should balance the line between threshold and optimal risks. This will also give you valuable insights into the quality of your scorecard.
   
   
2. Product risk vs portfolio risk
   Lending products generally aim at different customer segments, have different revenue bases and therefore the risk appetite could be different. Giving mortgages, asset finance, cash loans, BNPL for smartphones or furniture have different risk bases. Bringing all products to the same risk bottom-line leads to losing control of risk management and minimizes revenue bases. 
   
   
3. Balance of credit and business risk
   Keep in mind that every time you reject a good borrower, you lose just as much as if you accept a bad borrower. You might not realize this because you can’t see it on the balance sheet or portfolio benchmark but it is unearned revenue. A good credit risk manager would work to maximise revenue for the organisation.
   
   
4. “Clean Thursday” time
   Building scorecards based on your retrospective portfolio only tells one limited side of the story. You only see negative outcomes for accepted deals but not rejected deals. The only way to figure this out is a “Clean Thursday”. On thursday, you turn off scoring and accept all borrowers whether positive or negative. I do not mean exposing the whole organization for the whole day. Select carefully some products, customer segments, scorecards, POS, and activate “clean Thursday” in secret. The potential losses will be paid back by the increased quality of your scorecards.
   
   

My overall conclusion is that only minimizing risk is nearly the worst strategy to use. The major difference between profitable and struggling lending organizations is their ability to manage credit risk vs return. It distinguishes borrowers when income is the same.


Making a profit by minimizing risk is simply not a good long term strategy.

For more information on how you to leverage alternative credit data for your business, do contact me, Femi Oluyide on femi@carmachain.com