There are no two ways about it: current business risk monitoring processes are flawed. Given present economic trends, this is hardly ideal. A raging pandemic gave way to rock-bottom interest rates of 0 to 0.25% (this is likely to stay the same through 2023). Combine this with low inflation and undersized debt servicing costs, and you have a financial environment primed for borrowing. Not surprisingly, this has led to an uptick in both business loans and delinquencies. In 2020, a historic amount of SMB loans were given out just as default loan amounts tripled and insolvencies increased by over 20%. So, while there is no time like the present to borrow money, there is also no time like the present for financiers to shore up their risk mitigation tactics.
In this blog, we will look at 4 limitations of current risk monitoring processes that prevent this from happening and how TRaiCE addresses these challenges.
4 limitations of current business risk monitoring
Current business risk monitoring methods rely heavily on the manual process. Here’s why that is inefficient:
1. Incomplete monitoring
Manual portfolio monitoring is not for the faint-hearted. A typical investment portfolio contains hundreds, if not thousands, of accounts for a risk manager to monitor. To regularly gather, analyze, and stress test the necessary business and social metrics needed to monitor each investment is a herculean task. For example, a manager with 5000 investments in his portfolio will need to analyze 250 accounts a day if he wants to monitor each account at least once every month. Even if he takes only 2 hours to process one account, he will have to work a 500-hour day to make that happen. Perhaps if he lived on Planet Mercury (where one day is 1408 hours), it would be possible. On good old earth, however, it is not. Even with a team of analysts under him, it would be a challenging task. The result is a portfolio monitoring process that is dangerously incomplete.
2. Biased and skewed monitoring
As we’ve established before, regularly monitoring every counterparty in a portfolio can be a near impossibility. The only recourse for risk teams then is to evaluate a sampling of their borrowers instead. This manual prioritization of portfolio monitoring is fraught with risk. For one, the process is frequently biased as it is often based on intuitions and premonitions rather than hard logic. For another, it can produce false positives and negatives making it harder for teams to accurately judge creditworthiness and set authentic benchmarks for risky customer actions.
3. No room for ‘alternate data’
Statements such as ‘Data is the new oil’ may seem cliché, but there is a lot of truth to them. In today’s information-driven world, there is more data out there than has ever been before. By reviewing only business metrics, traditional risk monitoring processes fail to exploit this wealth of information. Alternate data such as a company’s social presence and overall digital footprint can provide a more holistic and non-traditional view of a business’s health and, therefore, its propensity to default. This is particularly true for borrowers who do not have an established credit history.
4. Current solutions are more focused on loan origination
While there are a ton of business risk management solutions out there, most are focused on loan origination. There’s no doubt that credit origination is an essential part of financing. However, a lender’s watchfulness should not stop with credit disbursal. In fact, that is when the rubber meets the road, and the hard work of ongoing vigilance starts. In today’s fast-paced world, fortunes can change in the blink of an eye. Therefore, creditors must keep an eye out for financial shifts that could quickly impede their borrower’s ability to repay credit. Credit origination without credit monitoring is like buying a car but never refueling it. Doing one but not the other will only get you so far.
4 features that make TRaiCE the solution
1. Complete and real-time risk monitoring
The TRaiCE platform is an AI-augmented customer and portfolio monitoring system that can speedily process all the information needed to monitor business risk. In essence, it whittles down a process that usually takes a few days to complete to one that is finished in mere minutes. This means that you can monitor every investment in your portfolio daily, no matter if you have 500, 5000, or 50,000 accounts. It also means that you don’t need to rely on outdated risk profiles to monitor your borrowers anymore. Instead, you can make more frequent, bias-free, and data-backed risk calculations, all of which can increase your loss coverage substantially and help you make more prudent business decisions.
2. Early risk detection and warnings
By continuously processing internal and external data in real-time and contrasting them with micro and macroeconomic information, TRaiCE’s cutting-edge Early Warning System (EWS) can quickly identify early red flags that point to a customer’s probability to default (to learn more about how financial EWS systems work, read our in-depth white paper on the subject). The TRaiCE system can compute future risks up to 6 months in advance. This kind of future-forward risk monitoring allows you to identify opportunities to de-risk well before an adverse event occurs, thereby reducing your credit exposure and increasing your profit margins.
3. More accurate and bias-free risk calculations
Over 2 quintillion bytes of data is generated every day. Unfortunately for a risk manager, an overwhelming majority of this data is useless white noise. Trying to sift through mountains of data looking for pertinent, useful business information can be like separating grains of sand, doable but only with great difficulty. TRaiCE’s proprietary algorithms filter through all this noise to identify, extract, and use only appropriate creditworthiness-impacting information in its risk calculations. Using this smart data ensures a high signal-to-noise ratio, giving you risk analysis that is more accurate and unbiased.
The TRaiCE platform automates every step in the business risk monitoring process. The system takes care of everything from data collection and analysis to monitoring for red flags, identifying default patterns, and computing risk reports. What’s more, the platform has a user-friendly interface with a dashboard that gives you a birds' eye view of key performance metrics for all your investments. It also rank-orders your counterparties according to default probability and allows you to take appropriate actions, such as exiting, retaining, or placing an account under review from the dashboard itself. And since it is a self-learning application, it remembers your actions and changes its recommendations accordingly thereafter.
Try out TRaiCE with a free 2-week trial
TRaiCE is a demonstrably efficient way to monitor an investment portfolio. In early trials where we reviewed less than 10% of a bank’s portfolio using TRaiCE, we demonstrated how the application could mitigate more than 50% of the bank’s future losses. Imagine what it could do with the whole portfolio! Don’t believe us? Why not try us out free for 2 weeks and see for yourself. We’ve designed our system to be simple and easy for you to use. Our trial package comes complete with a user account set up for you along with 5 real-life business cases pre-installed into the application so you can see how it works. Contact us at firstname.lastname@example.org and we will be happy to set it up for you.
Conclusion - TRaiCE is a demonstrable ally
TRaiCE’s superior capabilities solve a lot of the limitations of current business risk monitoring methods. It provides complete, unbiased, and regular credit monitoring that includes both traditional and cutting-edge parameters. By doing this, TRaiCE frees you up to focus on adding more business value to your portfolio. With default rates going up every other day, this is a good thing.