Customer Credit Risk Management in Industrial Corporates

Abstract

Most credit literature concerns the management of loan or bond portfolios of banks or funds investing in fixed income. Sizeable parts of global corporate financing however is done by trade credit, where suppliers extend credit to their customers by allowing them to pay at a delayed date for goods or services received. This paper provides an overview to the practical issues of building a structured credit risk management in an industrial corporate. The paper looks at the economic theory behind providing trade credit and describes the various organizational models for managing the credit risk. It then proposes a data model structure to perform a consistent credit risk measurement both on a single-obligor and a portfolio level looking at the practical aspects of implementing it as a system (master data management, exposure aggregation, choice of external data, setting up a rating process, building a credit portfolio reporting and loss model). It concludes with an analysis of the best practices of corporate credit risk management including the limit setting, as well as a set of questions to help the corporate credit risk manager to evaluate the internal credit risk practices. Much of the content is based on an interview series conducted with credit managers/ officers from large european industrial corporates, ensuring its consistency with current practices and real world applicability.