RETAIL CREDIT STRATEGY AND POLICY

Retail Credit Risk strategy is the most important document, as it describes the direction and methods necessary to achieve the desired targets. As digitalisation is now a major part of banking transformation, it’s no surprise that digitalisation is also becoming embedded in banking strategy. Digitalised banks are already showing increased revenues and decreased expense so it’s now critical to incorporate digitalisation into strategies and policies.

Steps of setting up a strategy

Step one: A bank must have an overall mission that represents many factors such as future directions, the bank’s appetite for risk along with many other elements. We need to set up the Retail Credit Risk strategy within the framework of the bank’s overall mission.

Step two: In setting up the mission, we have to set the objectives and goal for the coming year and potentially for a longer period of three to five years. These must be carefully set to make sure that they are achievable and within the bank’s capabilities and resources. The set objections and goals must be studied well to make sure it is achievable and coop with the bank resources. The perfection lies in the balance between what is hoped in shape of objections & goals on one hand and the capabilities & resources on the other hand.

Step three: After setting the mission and the objectives, we start designing the structure of the retail credit portfolio, and this is where the true representation of the bank’s credit risk appetite becomes obvious and clear. The bank will set a ceiling for the overall bank’s credit risk, and then divide that number depending on the requirements of the then split into sectors such as Corporate, Retail and Investment bank. The next step is to further divide the number into product portfolio ceilings, assigning a risk ceiling for products such as Auto loans, a ceiling for Credit Cards, a ceiling for Mortgage loans, and so on across the product portfolio. Further ceilings are assigned by industrial sector such as tourism, medical services, etc. There would be ceilings for different markets or countries. Then we come to the level of individual ceilings such as minimum and maximum amount for an individual borrower. Each ceiling represents not just amounts but also durations.

For example, we may have a ceiling for Retail Credit portfolio of $100 billion. From this amount, Auto loans have a $15 billion ceiling and tourism has a $5 billion ceiling. In turn, one single borrower in tourism would have a ceiling of $1 million. Likewise, we may have a specific ceiling of duration for each category.

Step four: The final step is the function that includes the details. It’s said that the devil in the details, and success of failure lies in the successful execution of this step. This step produces the full document that covers the detailed product structure and criteria including the targeted segments, the financial viability study for the product showing the amount or percentage of expected risk as well as the percentage of the unexpected risk.

This plan will contain the pricing structure, which includes the risk factors, the market, the expected market risks, the delivery channels, and the completion dates.

Every detailed feature has its own factor of risk that we need to study and calculate to be able to take necessary precautions.

The planning process will include a controlling function which consists of measuring and evaluating the results of strategic plans and activities to take corrective actions.

The Content of a Plan

Executive Summary
Current Marketing Situation
Threats & opportunity analysis
Objectives & issues
Marketing Strategy
Action Programs
Budgets
Controls

In each of the above steps, the person in charge of risk control should be involved and share their views about requirement for risk control, precautions needed, and cover the financial risk in pricing and in profitability.

Back to