Credit policies may change in accordance to the present company activities (such as expansion) and most especially with economic cycles. For example, if the economy is foreseen as going to be tight, it is always anticipated that there will be an increase in defaults, including the interest rates among others. Likewise, it will directly affect credit availment or extensions. It also lowers purchases for goods and services. As a consequence, fewer goods are produced resulting to unemployment –leading to delinquencies, defaults, foreclosures and write-off of credit. The best strategy for credit risk management is to manage this risk by having an updated and sound credit policies and procedures promulgated the no-nonsense way.
Implementing sound credit policies, procedures require consciousness and discipline about risk management and how to protect the company against possible defaults. Economic conditions affect credit because bad credit is generally granted during economic expansions. The boom and recovery stages of economic cycles create unwitting over confidence. Credit extensions, marketing, plans and budgets may become more aggressive during these economic cycles.
Credit judgment may falter, risk taking is stretched and unwitting motivation to match and follow competition. Creditors and debtors alike fail to recognize signs of future problems and greater credit risk. To aggravate the situation there are more negligence of commission or omission during good times. Boom times has a way of covering for mistakes during the recovery stage of the business cycle when economic activity have bottomed out and there are signs of economic growth. I always advise my clients that their debtor’s total amount of outstanding debt must be considered and the credit risk exposure should be controlled by the term of credit setting; credit limit; and the amount of the credit, setting a repayment schedule and requiring security or collateral. Logically, if you can update your credit policy to cover this, it will be helpful to manage the credit risk. As always, earning from good credit/ loans will offset losses from bad credit/ loans.
Some other companies opted for di versification. However, this doesn’t totally eliminate risk, it only spreads the risk across different debtors or types of credit. There will be inadequacy in diversification if the debtors/ customer’s base is concentrated in one industry or group of debtors. Overall, diversification of the credit portfolio maybe diversified either by two-types. First, by changing the emphasis in retail to wholesale credit; and second, new products can shift credit mixes as well as secondary market sales of specific products/ services.
(For credit & collection (C&C) questions, comments and rejoinders you want to share or inquire, you can reach Mr. Limtingco at 0917-7220521 or at elimtingco@cibi.net.ph)