Credit risk management: Collateral, covenants and risk review

The approval of a loan is just the beginning of credit risk management. The ongoing processes of managing collateral, loan covenants, and monitoring the borrower’s financial condition are key to ensuring that the bank is in the best position to minimise its loss, should the borrower encounter problems with repayment. 

Many institutions are still using manual procedures to perform these functions. While these procedures can be effective, many suffer from issues relating to lack of efficiency, consistency, and transparency. Over the life of a loan, which may extend to 10 years or more, these problems can result in unwanted challenges for the financial institution should the borrower encounter financial difficulties. Frequently the bank learns about these problems later than it should, and when looking to the collateral it may realise that its interest is insufficient to insure the risk.

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