How can credit analysts remain technically balanced — The answer will surprise you
Published on March 9, 2021 by Santhosh Shenoy Tonse
Credit analysts — the pessimists (the “glass half empty” mindset)
The credit analysis function has been in place since time immemorial in one form or another — from the time something was offered by one party to another with the obligation to return it after a period of time. The current form of the organised credit analysis function originated on the principle of conservatism, checking lending proposals prior to submitting them to a credit risk team. Credit analysts have, therefore, been primarily extrapolating downside scenarios, placing restrictions on borrower actions to avoid cash leakage and ensure stable performance for timely repayment. Regulatory requirements also emphasise the principle of conservatism. This is vital, as banks hold depositors’ money and the failure of banks could spark a systemic risk, ultimately leading to the collapse of a country’s financial system (as evidenced by past banking crises, notably the 2007–09 subprime crisis).
Mitigating credit risk — the primary focus of a credit analyst
The need for a bank to have a robust credit risk management function cannot be underestimated. Banks aim to eliminate credit risk by laying out lending policies that provide the framework for lending across industries, sectors, geographies and borrower types. Credit analysts have always operated within this scope, and every credit analyst’s objective has been to mitigate risks when drafting the lending proposal, and propose measures if the financial performance were to deteriorate. In fact, credit analysts’ performance has been measured by factors such as the number of early warning flags raised and the number of actual defaults, as they are the first line of defence, together with the origination team.
Credit analysis is an origination pay model — (the “glass half full” mindset is now trending!)
Given that the credit analysis function is an origination pay model, there is ever-increasing pressure on credit analysts to get deals approved. This is exacerbated by increasing competition and banks’ narrowing net interest margins. Credit analysts, therefore, are required to go the extra mile to get a deal approved. Measures include restructuring the deal, extending maturity, monitoring the borrower more frequently, considering syndication vs bilateral deal proposals and convincing the customer to offer additional collateral, cash cover or personal guarantee, and agree to covenants. Credit analysts, therefore, now represent the origination team on deal negotiation with credit risk teams.
Portfolio monitoring: Paving the way for identifying new/additional lending opportunities while assessing a borrower’s credit health
The role of the credit analyst has widened even further in recent years. New-age credit analysts raise early warning signals on worsening financials and also identify lending opportunities when the financials improve. We provide some examples below:
The role of third-party specialist firms in the evolution of the credit analyst role has been significant. Given the increasing competition banks face, global banks have benefitted from partnering with third-party specialist firms such as Acuity Knowledge Partners that provide not only highly experienced new-age credit analysts but also substantial cost savings.
How Acuity Knowledge Partners (Acuity) can help
Global banks have, over the past two decades, chosen Acuity as a strategic partner in transforming their credit analysis function. We manage a bank’s credit analysis function from end to end with our more than 500 highly experienced credit analysts with the requisite educational qualifications and our proprietary suite of Business Excellence and Automation Tools (BEAT) that provide intelligent automation capabilities using artificial intelligence and machine learning.
About the Author
Santhosh has over 15 years of work experience in credit analysis and over 6 years in Commercial Lending. He is an Associate Director, managing the portfolio management function of a European Global Bank. Additionally, he brings rich experience in structuring lending products, projects & transitions, operational excellence and application of artificial Intelligence and automation to banking functions. He has managed client relationships for Commercial Banks in the UK, US and Middle East. Prior to joining Acuity Knowledge Partners, he worked with Ocwen Financial Solutions in the mortgage banking function.
Santhosh has Advanced Commercial Lending certification from the London Institute of Banking & Finance, Financial Risk Manager certification from GARP, US and a Master’s in Business Administration degree in Finance.