Power of Portfolio Analytics and the New 4C's of Credit: Consistency, Compliance, Consultancy & Creativity, The

Credit & Financial Management Review, 2004 by Balduino, William F

Abstract

The consumer credit arena has been and most likely will continue to lead and push advances in automation for the commercial credit space. Consumer lending institutions have long ago realized the wealth of information contained within their own customer portfolios. These lenders have taken advantage of and used this information to segment accounts, profile customers and ultimately drive business practices and results by applying portfolio analytics to their customer base.

The Value of Portfolio Analytics

Today, an increasing number of savvy commercial credit professionals are essentially doing the same by endorsing portfolio analytics. This is because they have recognized the insight and hidden, unique value the portfolio offers. As a substantial business enabler, portfolio analytics allow credit professionals to create value and ultimately position themselves, their organization and their companies for success.

Using the power of portfolio analytics may take some perseverance - especially in business situations where the internal understanding of roles and responsibilities are not clearly defined. However, one could argue that these also represent the best environments since they offer no restrictions on creating value and in some sense the "sky may be the limit". Let's face facts, at the end of the day, all quality initiatives, all process improvements and ancillary activities are ultimately judged by the value they create for the business.

Value is subjective and can be defined many ways by different people. However, it should always result in a strategic or competitive advantage for the enterprise. The issue is simple, the Risk Management function and those professionals managing it have the unique capability of providing an introspective, insightful view of the behavior, characteristics and profile of their customer base. This detail, when acted upon, is the foundation for confident decision making and knowledge-based change in a company's strategic activity or the direction it takes.

Speaking of change. At one time the original 4C's of credit represented character, capacity, condition and capital.

Today, progressive enterprises are considering and adhering to four new tenets:

1. Consistency - in their applications.

2. Compliance - through their internal and external relationships.

3. Consultancy - in their relationships with internal business partners.

4. Creativity - in using data to provide insight, uncover opportunities and drive value.

Consistency

There are numerous operational advantages to using analytical tools, such as the ability to review outputs and performance by location, salesperson, business unit, product, line of business, risk management analysis, etc. for relevant facts about outputs, behaviors, and tendencies relating to best (and worst) practices. What this means is that the aggregation and segmentation of portfolio data provides the foundation for more strategic decision-making at all levels of an organization. This ability for an organization to share and cascade information helps in defining policies and the appropriate subsequent operational practices. This is an on-going process as an organization looks to mine it's own data while also considering external economic influences.

A full, consistent analysis of the portfolio enables the Risk Management practitioner to employ a sound practice for establishing standards and timing for account reviews. Consistency also enables an objective approach for raising and lowering credit limits. Similarly, it eliminates the potential for subjectivity by analyst or a differential in output based on tenure or knowledge base. Thus, allowing for the most professional evaluations for both your internal and external customers. A preferred timetable would be determined as a result of the information culled through the analysis. However, the overarching factor driving the frequency of account reviews is the company's appetite for risk.

Compliance

The strategic use of portfolio analytics also enables you to comply with internal and external audit requirements driven by your company's established risk management policy. If the company's risk tolerance dictates an annual or semi-annual review for non-risk customers; a semi-annual or quarterly review for slight risk customers; a quarterly or monthly review for slightly higher risk customers, or a weekly or daily review for the highest risk customers, a monitoring tool will allow you to answer the mantra of today's corporate environment - do more with less. In other words, you're following the first commandment of credit - thou shalt evaluate every account within the portfolio at least once a year. With the increased focus by auditors on established policies, portfolio analytics provide an optimum solution to maintain compliance.

Proactively sharing the output from your portfolio review with audit teams to witness the movement of risk - or lack thereof - can prove very powerful, virtually enlisting your audit team as a well informed business partner and eliminating a year end interrogation. The outputs are also a fundamental opportunity to discuss portfolio dynamics with senior management in both the sales and finance organizations, to gauge how best to modify and/or adapt to changing economic or strategic conditions.