Many bank customers complain about the requirements they face. The conditions that must be met to obtain a loan or credit include, above all, achieving adequate creditworthiness. Theoretically, we could say that this is unnecessary stacking of formalities, because after all the most important thing for a bank should be that we repay the liability on time, not from where we will get funds for this purpose.
Practice shows that it works a little differently. Every new customer is at a premium, but none will give the lender a 100% guarantee that they will pay off their debts on time. The bank must take care of this guarantee.
What is credit risk?
We are happy to share stories that you have heard or read about how a bank or loan company has contributed to a significant reduction in your client’s account. Indeed, there are many such examples, but let’s think: are we sure that in each of these cases the fault was solely on the lender’s side? What about those clients who can’t cope with their liabilities and stop paying back their loans?
As it turns out, part of Poles’ debt is due to the irresponsible use of banking and non-banking products. More information on this topic can be found in the article RECORD DEBT POLES.
We must be aware that even a few days delay in repayment of liabilities is for the institution a loss and threat to financial liquidity, not to mention the danger associated with the complete cessation of payment of installments. Such situations are nothing but credit risk, which the bank must take into account when signing a contract with a customer. Some institutions cope with it by imposing more restrictive terms of cooperation for their clients (higher financial penalties in the event of delays, debt collection, etc.), others prefer to immediately increase the cost of credit so that the interest income compensates for any losses. There is no one best method to protect your interests.
Credit risk assessment
Credit risk is not entirely clear-cut and has two dimensions. The first relates to the risk of financial loss and customer solvency. This means uncertainty in the future of the borrower’s financial situation and the risk that the terms of the contract will not be met on time. This type of risk includes the danger of not settling the loan agreement, in whole or in part. The second type is collateral risk.
This is a rather complicated phenomenon, but it occurs equally often: this type of security results from the threat that its item, which has not been insured, will be damaged or damaged. The easiest way to explain this is with the example of a car. If it constitutes a surety for a loan and, as a result of an accident, will be damaged to such an extent that the repair will not make sense, the bank loses its guarantee that it will somehow compensate the client’s insolvency.
At the same time, it should be remembered that these two types of credit risk may also interact with interest rate risk and changes in exchange rates. To avoid losses, a multi-pronged action is necessary, which consists primarily of risk identification and assessment of its scale. Further elements are its constant monitoring, as well as attempts to predict what the consequences of the occurrence may be. The management of these elements will depend on the bank because everyone has their own policy.
Creditworthiness and acceptance of the application
Calculation of creditworthiness is a key step in the verification process of a potential borrower’s application. Banks will not cooperate with us until they are sure that we will be able (although in theory) to pay back their liabilities. It is this famous creditworthiness, i.e. the ability to settle the contracted debt along with interest on the date specified in the contract.
During the qualitative analysis, the creditor draws attention to completely different factors, such as age, marital status, education, seniority or position held. Information on your previous credit history is just as important. The bank checks whether the potential borrower has diligently repaid previous obligations.
If you want to use banking products, you won’t go far without creditworthiness. In any case, no further than the stage of completing the application. If we are not sure whether the result of our credit history assessment will be positive, we can check it ourselves by downloading the BIK report. Each consumer can receive a detailed statement of commitments for a small fee of PLN 39.