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Credit analysis benefits of a probability of default analysis

Libby Sharman
December 7, 2012
Read Time: 0 min

Financial institutions may inject a probability of default (PD) analysis into several steps of their credit risk processes, and each use-case provides a different benefit to the bank that directly impacts its workflow efficiency, credit decision quality, and most likely profitability.

Before any financial statements have been spread, a PD analysis can be an effective way to perform pre-screens. Lenders, for example, can analyze a business in just a few minutes and quickly see if the loan could be worthwhile (yes) or one on which they should quickly pass (no). These pre-screens could reduce strain on the credit department.

It provides management with a tool with which they may perform a deeper and more objective analysis when making credit decisions. Banks or credit unions that may have previously had very small or nonexistent commercial and industrial (C&I) concentrations in their portfolio might be especially interested in tools that add depth and objectivity to the analysis performed on potential borrowers. Whether a banker is used to analyzing private companies or not, a PDM is an accurate and reliable addition to an existing credit analysis process.

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Similarly, a financial institution can use a probability of default model to validate their risk rating process. For a loan that may be teetering between ratings, a calculated PD for a business could provide additional clarity as to its appropriate rating. In most cases, a probability of default is an excellent component to add to an existing risk rating scorecard or similar analysis.

To find out more on making informed decisions about loans, avoiding potential pitfalls and managing risk, check out this whitepaper: The Definitive Guide to Global Cash Flow

About the Author

Libby Sharman

Libby Sharman is a Vice President of Marketing at Abrigo.

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Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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