Enhancing credit underwriting operations

Banks are exposed to many different kinds of risk, one of which is credit risk. Credit risk arises from the possibility of bank borrowers refusing or being unable to pay for their loan in full and on time, resulting to losses. Banks therefore need to reduce credit risk to avoid losses and increase profitability. Credit risk has different sources, which include poor credit underwriting, high-risk lending, and lax credit assessment and lending practices. For banks to reduce their credit risk, they must ensure that their credit customers or borrowers will pay what they owe to the bank in full and on time, and this is achieved through effective credit underwriting. Credit underwriting is the process by which a bank assesses the capability of a borrower to repay his or her loan in full and on time by gathering and analyzing information about a borrower. This process is one of the primary determinants of a banks credit risk, as it is through this process by which a bank is able to understand its risks to lending to a particular customer, and decide whether to accept such risk or not. By improving and enhancing its credit underwriting operations therefore, a bank would be able to reduce its credit risk. Rural banks in the Philippines are, just like any other bank, exposed to credit risks. However, rural banks being established to serve mainly farmers, fishermen, small traders, and other unbanked or under-banked clients from rural communities have unique clientele which require approaches to credit underwriting different from banks located in urban areas catering to large, established, and sophisticated clients such as conglomerates, large corporations and businesses. This action research, through a collaborative process, developed and implemented simple interventions designed to enhance credit underwriting operations at rural banks to help them reduce their credit risks and comply with increasingly stringent regulations. Through interventions such as designing a documentation checklist or developing a procedure for analyzing the cash flow of informal sector borrowers, rural banks would hopefully be able to reduce their credit risks, notwithstanding their unique and niche clientele