Between Credit Risk Mitigation and Customer Satisfaction
In order to ensure that the bank is not exposed to undue risks, Stanbic IBTC has developed a framework for adhering to laid down guidelines before granting loans to its customers.
The significant rise in the level of non-performing loans (NPLs) in the banking industry clearly requires banks to put in place stringent risk management policies that would help them safeguard depositors’ funds.
This is also necessary to ensure that the financial system remains stable.
Indeed, following the drop of low oil prices, dwindling oil revenue, foreign exchange scarcity and a crippling recession, the last two years saw intense weakening of the macroeconomic environment, resulting in a deterioration of asset quality and rising NPLs in the banking industry, from about five per cent to 15 per cent presently. This has remained a source of concern to both the banks and the regulators.
Normally, risk is regarded as a threat to a bank’s steady flow of income. Risk management is, thus, the identification, assessment, and prioritisation of risks, followed by coordinated and effective application of resources to reduce, monitor, and control the probability and/or impact of disastrous events.
It is also the process by which managers identify key risks, obtain consistent, understandable, mitigating measures, choosing which risks to avoid or reduce and by what means, and establishing procedures to monitor the resulting risk position. The essence of risk management, according to the Central Bank of Nigeria (CBN), is to detect prospective problems before they become actual problem, and the implementation of an enterprises wide strategy to manage those risks.
Thus, an ideal risk management programme assists an enterprise to steer clear of potential risks before they occur throughout the life of the product or project. Risk is the possibility; likelihood or chance that something unpleasant or unwelcomed will happen that is capable of damaging an asset, or all of the original investment or the possibility of financial loss.
More precisely, risk is the possibility of damage or any other negative occurrence that is caused by external or internal vulnerabilities, which may be avoided through preemptive action. Risk is commonly associated with uncertainty, as the event may or may not happen.
Therefore, a risk management design includes tools or methods of analysis that allows an organisation to reduce, delay or avoid likely risks.
The rational approach to risk therefore, is at the very least, to restrict exposure to it, ideally to avoid it all together.
According to the CBN, the stability of the financial system is a major challenge to the regulatory authorities, given the implication of its disruption on account of the insolvency of any operator on the economy and beyond. The CBN, mindful of the challenges posed, has reorganised/streamlined its internal structure to boost service delivery and enhance its capacity to better supervise the industry.
Nonetheless, image management is indispensable for the financial service industry, since it defines how others relate to the bank, as well as how much faith and trust savers and other stakeholders will place on a bank.
Like attitude, the reputation of a bank – one of its priceless assets is most at risk if a bank suffers a material loss through bad risk management.