The Handbook of Credit Risk Management, 2nd Edition

CHAPTER 3Checklist for Origination

In the previous chapter, some key governance issues as they relate to activities generating credit risk were described. A good organization is not enough, though. The profitability of a credit portfolio is heavily impacted by the way all professionals involved in the process behave. It all starts with the handling of new transactions. In the context of this book, this is what we call origination.

Origination also matters for business deals that are not credit deals per se. In the ordinary course of business, companies assume credit risk in order to sell products and services, such as extending credit to a customer. For these types of transactions, the same principles about origination apply. Business heads will seek to generate volume and will want to make credit terms easy for clients. That extension of credit must follow the exact process described in Chapter 2, for example, establishing guidelines, setting limits, assigning parameters, and putting together an approval process that is clearly defined.

Since the best way to avoid credit losses is to carefully select transactions to enter, good credit risk management starts with origination. Even under pressure to generate revenues, smart organizations differentiate themselves by their ability to avoid bad deals and to select strong transactions. This is true for all businesses; entering into business arrangements with robust vendors and good customers is the difference between profits and ...