Financial Risk management
Broadly risk management consists of identification of the risks and taking suitable actions to counter or control them. Risk management’s objective is to assure uncertainty does not deviate the endeavour from the business goals. Within the details, financial risk management involves using financial instruments to manage exposure to risk, particularly credit risk and market risk.
Credit risk refers to the risk that a borrower will default on any type of debt by failing to make required payments. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. Market risk is the risk of losses in positions arising from movements in market prices.
The financial risk management is pertinent to financial institutions which are related to the lending business e.g. Banks, NBFCs, money lending companies and credit rating agencies. In this article, we will focus on credit risk given that credit risk is more relevant to the lending activity, the core business of a money lender.
How can Heckyl help you?
Take an example of a corporate bank which has lent money to hundreds of institutions. In addition to this, there will be many corporates who are not current borrowers but would be seeking loans from the bank in the future.
If any of the current debtors turn sour, the non-performing assets (NPAs) of the bank will increase. This in turn will cause a drag on the bank profitability and performance. So it becomes imperative for the bank to analyse the financial health of current and future debtors.
It is indeed a taxing proposition for the risk department of the bank to follow hundreds of institutions in real time to capture any unusual activity or a red flag. The problem statement in this case can be loosely defined as: “Can we use the technology to find out ‘in trouble’ or distressed debtor companies, before the curve?”
This is where unique capabilities of Heckyl come into the picture. Heckyl sources real-time data from more than 1.5 million sources which are relevant to the financial industry. The sources include (but not limited to) government agencies, central banks, company websites, media houses, twitter, facebook, blogs etc.
Using machine learning algorithms and natural language processing (NLP) techniques, Heckyl is able to tag each news item to various categories/red flags which are relevant for a credit analyst. These categories are: change of auditors, management change, expansion plans, legal issues, product launches, restructuring, sales of assets, capex reduction etc. Additionally Heckyl engine is highly customizable and can incorporate any additional business rules as per the requirement.
Based on the combination of real-time news flow and suitable business rules, an overall credit rating score can be generated for a given company. Since this rating score will be shown in real-time, it will help a credit manager to analyse his portfolio on-the-go and remain ahead of the curve.
At a Chief Risk Officer (CRO) level, a CRO dashboard will help him/her analyse health of all companies in a single screen in real time. This dashboard can be customized to have various data points (companies/sectors with highest fall/rise in health score, companies/sectors with red flags) that will help the CRO in effective decision-making. The data can be further drilled down at the company level through monitoring company dashboards. Overall this will help the CRO to take any suitable action to manage the credit risk.
A similar dashboard can also be developed at the Risk Manager (RM) level. The RM dashboard will help him/her analyse health of all companies in his/her portfolio. This will help the organization to manage risks at both (the risk managers and the CRO) levels.
The risk management solution of Heckyl will help a financial institution to manage its credit risk in an effective manner. To know more, mail us at firstname.lastname@example.org.