Why Credit Risk Management is Important for Credit Societies

Credit Union Risk Management

As a financial institution, it is crucial that credit societies take advantage of risk management software. An effective risk management software can help a credit society grow its revenue while improving the premier customer experience most credit societies have cultivated and that their members have come to expect.  

What are the internal and external risk factors that concern credit societies? 

Internal risks for credit societies can include fraud, data breaches, legal noncompliance, injuries to staff or visitors, etc and should be the focus since they can be controlled.  

External risks can include exchange rates, interest rates, natural disasters, and loss of funds due to theft, which typically cannot be controlled.  

While it may be beneficial for a credit society to have a strategy to deal with external risks, it is unlikely that any kind of risk management will completely nullify all these external risks.  

What are the major risks facing credit societies today? 

According to the National Association of Federally-Insured Credit Unions (NAFCU), there are 7 types of risks credit societies can expect to manage. Properly managing risks is a critical aspect of compliance and financial success. In an extremely risky industry, credit societies should invest extra resources into ensuring they have a sound risk management process. The 7 major risks include: 

  • Credit risk 
  • Interest rate risk 
  • Liquidity risk 
  • Transaction risk 
  • Strategic risk 
  • Reputation risk 
  • Compliance risk 

Strategies for Credit Risk Management

When it comes to risk management strategies, it’s better for a credit union to have a strategy (even if it’s not the most effective) as opposed to having no strategy at all. Smaller credit unions may be able to utilise simpler, more manual strategies, but a risk management software is recommended for all organisations, no matter the size. Here are two strategies credit societies can use for risk management: 

#1. Key Risk Indicators  

KRIs (Key Risk Indicators) can be tracked and reported to indicate early warning signs of risk and exposure. If your KRIs show a warning sign, it should be investigated immediately to maximise efficiency and reduce potential risks. KRI data should be collected regularly in order to maximise results. For example, KRIs could show how many loans a credit society has originated in the past. This KRI metric could help credit societies determine the appropriate mortgage loan amount depending on the amount of capital available. While KRI’s can be effective and useful, they do require careful attention, as any minor oversight could lead to increased exposure and potential setbacks in performance. 

#2. Risk Management Software  

Implementing risk management procedures can be costly, regardless of the strategy or strategies you use. When it comes to selecting the best risk management strategy you should focus heavily on the money it could potentially save you or make you overall. A risk management software is likely to be more expensive initially, but most effective in the long run. In addition to reducing risk for the credit society it can also enhance the customer experience.  

GDS Link’s risk management software can utilise a variety of data and analytics to help credit societies lend more and profit more while reducing risks. The software can be used for marketing and lead generation, pre-qualification, pre-screen, monitoring, analytics, data and decisioning, and more all while being easily implemented, self-managed, and self-tested.  

Elements of Effective Credit Risk Management 

Whether a credit society uses risk management software or not, management should be familiar with the elements. Let’s take a look at the elements: 

  • Know your customer: Knowing your customer should start with proper identification verification within the lending process. Once you have established a relationship, this should shift to a focus on collecting information so that your systems know normal behavior of a member. Overall, the more you know about a member, the better you can position your credit society as a financial advisor and provider of products. 
  • Know the non-financial risks: In addition to a creditworthiness assessment, you should consider qualitative criteria. Qualitative criteria can include local competitors or market share.  
  • Know the numbers: Before approving a loan, credit unions should know how the funds will be used and how they will be repaid. Understanding these factors can allow credit societies to assess risk and package the final offer.  

Once these elements are complete, credit societies can put a price on the deal and move forward with closing the deal. These elements should allow credit societies to better determine the risk associated with a particular lending decision. The less risk, the lower the interest rate should be. 

Importance of Credit Risk Management for Credit Societies 

A well-rounded and fully developed risk management plan will deliver much value and benefits to a credit society. Some major benefits include providing a safe environment and facility for staff and members while protecting property, assets, time, and income. In addition, risk management plans can reduce legal liability and the threat of potential litigation. Most credit societies cannot afford to overlook risks, thus justifying the importance of an effective risk management plan since they strengthen the stability of overall operations while supporting the success of a credit society.  

Risk management should be a part of all strategic business plans for credit societies. In today’s world, customers are seeking faster service and loan decisions. In result, credit societies must provide advanced technology and online services to ensure their members are satisfied. Our current market is struggling with uncertainty making it more challenging to determine how to view risk and while companies need to generate revenue to survive, credit societies want to avoid elevated risk loans. Alternatively, credit societies also need to fund loans to keep their doors open. So just how do you effectively manage risk given the current market and economy? Implement an effective risk management software that will optimise performance and automate processes to conquer the risk vs reward ratio, thus allowing credit societies to expand their existing customer base while increasing revenue.  

Improving efficiency and revenue can benefit the credit society brand and company, as a whole. GDS Link provides an advanced credit risk management software for credit societies. Those that use GDS Link software can turn data into decisions in seconds while successfully managing risk. To learn more or schedule a meeting with a Solutions Specialist, click the button below.  

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From loan originations and decisioning, to customer management and beyond, GDS Link helps thousands of clients manage risk while driving growth.