Sustainable credit risk management needed

A healthy credit system, whether in a single bank or across the entire banking sector, depends on one key principle: providing the right amount of finance. Both under-financing and over-financing create risks that may not appear immediately but can gradually weaken credit quality, affect business performance, and increase non-performing loans (NPLs).
At the centre of sound lending is a proper assessment of credit needs. The correct loan amount is not simply what the borrower requests, but what the business genuinely requires and can comfortably repay. Whether the facility consists of funded loans, non-funded facilities, or a combination of both, financing should match the borrower's business cycle, cash flow and risk profile.
Under-financing places immediate pressure on a business. Without adequate working capital, a company may struggle to purchase raw materials, pay suppliers, or meet day-to-day operating expenses. It may then resort to expensive or informal sources of finance, increasing its financial burden. Insufficient funding can also disrupt the working capital cycle, reduce production, weaken cash flow and ultimately impair the borrower's ability to repay the loan.
Over-financing creates a different but equally serious risk. When borrowers receive more funds than they need, surplus money may be diverted to unrelated businesses, speculative investments, or personal use. This breaks the link between the loan and the business activity it was intended to support. Since repayment depends on cash flow generated by the financed activity, fund diversion increases the risk of default. Excessive borrowing can also create a false sense of financial strength while exposing the business to unnecessary debt.
High levels of NPLs are often associated with weak credit assessment. Banks that rely heavily on borrowers' requests rather than rigorous analysis risk approving inappropriate loan amounts. Inaccurate financial projections, unrealistic assumptions and inadequate verification can all result in under- or over-financing. Even when the initial assessment is accurate, changing business conditions require regular reviews to ensure credit limits remain appropriate.
To minimise these risks, banks must strengthen their credit appraisal process by carefully analysing financial statements, understanding the business model and assessing realistic cash flows. Loan structures should be aligned with the borrower's operating cycle, while assumptions must reflect actual market conditions rather than optimistic projections. Equally important is continuous monitoring to ensure funds are used for their intended purpose and that financing remains suitable as business conditions evolve.
Right-sized financing benefits both borrowers and banks.

Md. Zakaria
First Assistant Vice President
CRM-CMSME Division
NCC Bank PLC.
zak.dufbs15@gmail.com