Effective risk management does not mean zero losses to a portfolio as some would like to believe, but rather minimizing the loss ratios and risk factors to optimize profits and returns.

Risk management is one of the most important, and undoubt-edly one of the most challenging drivers of profitability of banks. The concept of risk management has undergone significant changes in recent years with applications of new technologies leading to new innovations. Credit and risk management have been raised to a scienceno longer does the branch manager decide who will get credit based on his personal relationship. Scorecards, models and other tools are used to predict credit risk and to determine the right amount of credit for a customer.

Effective risk management does not mean zero losses to a portfolio as some would like to believe, but rather minimizing the loss ratios and risk factors to optimize profits and returns. Each business will have a different tolerance level for the amount of risk that it is willing to accept, and this can be determined in advance and built into the strategy. For example, riskier customers can be granted credit, but the business should compensate for it through the pricing structure. In mature markets, issuers seeking out new customer segments often have to venture into the higher risk near and sub prime segments, but can do so successfully with risk-based pricing.

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