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The term credit management may be broadly distinguished into two
idea or concepts. The first one mainly means the business owners
implementing credit management policies to receive the financial
obligations on time and avoiding bad debts. The second one mainly
means that if you are an American who is concerned about paying his
obligations on timely basis and thus meanings definitely deal with debt
management solutions the parties either being the creditors
themselves or debtors.
Credit score plays a very important role is anyone͛s life as a good credit
score opens great financial avenues for your future. With a good credit
rating you may be extended help for loans and credits. And thinking of
the poor side with a poor credit rating you will always face a problem
availing a loan. Thus you must pay your bills on time. You must pay off
your creditors before the due date. Pay off your credit card obligations.
All these things will help out to save your interest and late fees, which is
very high. You can save a lot of you money. You should not be running
away from your creditors. You will have to coordinate with them and
see how cooperatively they are. They all have specific debt
management plans that can benefit you. Don͛t run away from them or
else you will be landed up in a bigger trouble.
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You are a company or run a business. You can avail benefit of these
services to get your payments on timely basis. It will generate a cash
flow on the regular basis by efficient management and collection of
current and overdue credits extended. It maintains good client-business
relationship. Of course for these services credit management
companies charge come fees. But it is truly worth it. It also helps to
verify the client͛s good will and credit standing before giving any credit
to them. By abiding by credit management policies specifically designed
for the company these companies check the credit worthiness of your
prospective client and saving a lot of your time and energy.
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The capitalization rate reflects the liking of the investors for the
company. Methods of financial management: in the field of financial
there are multiple methods to procure funds. Funds may be obtained
from long term sources as well as from short term sources. Long term
funds may be procured by owners that are shareholders, lenders by
issuing debentures, from financial institutions, banks and the general
public at large. Short term funds may be availed from commercial
banks, public deposits, etc.
Financial leverage or trading on equity is an important method by
which a financial manager may increase the return to common
shareholders.
Prices in the share markets are affected by many factors like general
economic outlook. Outlook of the particular company, technical factors
and even mass psychology. Normally this value is a function of two
factors: the anticipated rate of earnings per share of the company the
capitalization rate. Similarly, for the evaluation of a firm͛s performance
there are different methods. Ratio analysis is a common technique to
evaluate different aspects of a firm. An investor takes in to account
various ratios to know whether investment in a particular company will
be profitable or not. These ratios enable him to judge the profitability,
solvency, liquidity and growth aspect of the firm.
The likely rate of earnings per share depends upon the assessment of
how profitable a company may be in the future. At the time of
evaluating capital expenditure projects methods like average rate of
return, pay back, internal rate of returns, net present value and
profitability index are used.
A firm can increase its profitability without adversely affecting its
liquidity by an efficient utilization of the current resources at the
disposal of the firm. A firm can increase its profitability without
negatively affecting its liquidity by efficient management of working
capital.1. while financial institutions have faced difficulties over the
years for a multitude of reasons, the major cause of serious banking
problems continues to be directly related to lax credit standards for
borrowers and counterparties, poor portfolio risk management, or a
lack of attention to changes in economic or other circumstances that
can lead to a deterioration in the credit standing of a bank͛s
counterparties. This experience is common in both G-10 and non G-10
countries.
. For most banks, loans are the largest and most obvious source of
credit risk;
. The sound practices set out in this document specifically address the
following areas:
The new capital Accord, likely to be agreed within the next year, will
give larger institutions major incentives to reduce their regulatory
capital and save money by improving their credit management
practices. Meanwhile, greater industry competition, industry
consolidation and new technology are adding to the pressure to
improve credit risk management throughout the financial industry. The
current emphasis on shareholder value and risk-adjusted return on
capital is directing investment towards business lines that manage their
risks more effectively ʹ including all types of credit risk. Traditionally,
credit risk refers to the risk that a borrower of counterparty will fail to
meet its obligations. Lending from credit cards to corporate loans is the
largest and most obvious source of credit risk.
But credit risk in some guise exists throughout bank activities, both on
and off the balance sheet from acceptances, interbank transmissions,
trade financing and derivatives trading to guarantees and settlement.
As you can see by passing your cursor over each point in the circle
below, it͛s not just banks that are subject to credit risk. Fund managers
and investors are directly exposed to credit risk in their fixed-income
investments. Insurance companies are exposed to it through their
credit investment and credit guarantees. Companies are exposed to the
risk that trading partners, distributors or suppliers may default or fail to
live up to critical obligations.
The advances in measuring and managing credit risk mean that a
passive absorption of credit risk by these companies is the way of the
past. Leading institutions now regularly isolate and package portions of
their credit risk by means of new tools credit derivatives and
securitizations and pass it to the financial markets. These transactions,
often hybrids of the ͞first generation͟ credit default or total return
swaps that appeared in the mid-1990s are thawing out the credit risk
that lies frozen in bank portfolios and channeling it to investors as our
first Expert Witness testifies.
The scroll-over Credit Cycle diagram, above, helps make clear how
interlinked all these changes are. An unholy alliance of factors set the
Cycle in motion in the early 1990s: new credit modeling technology,
investor demand, bank marketing, the needs of risk managers and the
power of diversification and attempts to arbitrage regulatory rules on
capital charges.
But the end result is that credit is developing as an asset class for
investors and as a means of diversification for banks and an increasing
range of financial institutions including insurers as our next Expert
Witness explains.
And while banks improve the way they identify, measure, monitor and
control their credit risk, they are also developing techniques and
systems that track the relationship between credit risk and other risks,
such as market risk to enable full enterprise wide risk management.
The first step in the credit risk management process is for an institution
to identify the risky credit in its portfolio of loans, dealer or
transactions. Banks, for example, achieve this by assigning a credit
score or rating to each individual borrower, so the bank can begin to
understand its credit risks and assess how best to manage them.
Some assets are easier to assign a credit score than others. The most
developed credit scoring techniques are for consumer loans, such as
credit cards and auto loans. As early as the 1980s, credit bureaus
focused on information such as credit delinquency and debt burden to
assess credit quality. A bureau score that captures almost all the
measurable risk inherent in a consumer relationship can be purchased
readily and cheaply from a credit bureau such as Equifax or Experience.
Credit provides also use information supplied in credit applications,
such as income and whether the individual owns or rents his home.
Automated scoring techniques provide a three digit number derived by
computer algorithm from the individual͛s credit report, which is
compared with patterns in thousands of past credit reports.
Outside the US, the data problem extends even to the largest
companies. This is partly because public credit ratings have been
applied to major US companies for years ʹ Moody͛s default database
holds information on 1,975 public US and Canadian companies that
have defaulted since 1980. By comparison, only 14 holders of long term
local currency rating have defaulted in Europe since standard & Poor͛s
began rating corporations there in 1975. All but two of these defaulted
in the last two years.
The Credit Cycle we identified earlier looks set to change this. Banks are
recording that without standard ways to assess the credit risk in their
portfolios, it will be difficult to convince both regulators and credit
investors that loan and other credit-linked middle market portfolios
represent a specific level of risk. Meanwhile, major credit rating
companies have begun to promote modeling approaches for middle
market credits that weight the various financial ratios in a manner that
is standard and which can be more easily tested against the limited
historical data that is available.
Public credit ratings are not the only way to assess the credit risk posed
by larger companies. The most commonly used quantitative method is
based on principles expounded by the well-known academic and
researcher Robert Merton. These ͞Merton Models͟ consider the
company͛s equity as a call option on the value of the firm͛s assets, in
which the strike price of the option is related to the liabilities of the
firm. The equity value and its volatility, together with the level of
liabilities, provide information that allows the credit modeler to
estimate the default probability of the quoted company.
Traditionally, once credits have been measured or scored, a bank would
decide to accept or reject the implied credit risk of the transaction. But
the new credit risk modeling, pricing and transferring tools mean that
banks can now actively manage their loan portfolios to ensure an
efficient risk/reward ratio and sufficient diversification of loans ʹ much
as they would an investment portfolio.
Credit rating are vital to the credit industry because they offer
consistent and publicly available credit scores, produced by
independent agencies, for either he credit worthiness of a major entity
or for a particular debt security or other financial obligation.
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The Basle Committee recently issues guidelines to help banks and their
supervisors to put in place a comprehensive credit risk management
program. The September 2000 paper, principles for the Management of
Credit Risk, highlighted four key areas:
The use of collateral has also grown dramatically in the last few years,
particularly in the derivatives market, where the amount a firm stands
to lose if counterparty defaults depend on how the market moves over
time.
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͞Banks are institution that enjoys the public money doing nothing for
the public͟. According the banking ordinance 1962 sec (6),
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With our money market account you can get limited check writing
privileges plus the higher yields of an investment account. This account
offers a tiered interest rate.
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Credit score plays a very important role in anyone͛s life as a good credit
score opens great financial avenues for your future. With a good credit
rating you may be extended help for loans and credits and thinking of
the poor side with a poor credit rating you will always face a problem
availing a loan. Thus you must pay bills on time. You must pay off your
creditors before the due date. Pay off your credit card obligations. All
these things will help out to save your interest and late fees, which is
very high. You can save lot of your money. You should not be running
away from your creditors. You will have to coordinate with them and
see how cooperative they are. They all have specific debt management
plans that can benefit you. Don͛t run away from them or else you will
be landed up in a bigger trouble.
cc
c
You are a company or run a business. You can avail benefit of these
services to get your payments on timely basis. It will generate a cash
flow on the regular basis by efficient management and collection of
current and overdue credits extended. It maintains good client business
relationship. Of course for these services credit management
companies charge some fees. But it is truly worth it. It also helps to
verify the client͛s good will and credit standing before giving any credits
to them. By abiding by credit management policies specifically designed
for the company these companies check the credit worthiness of your
prospective client and saving a lot of your time and energy.
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