The credit management of a company must be checked at rather irregular intervals. This review is called credit revision. This does not have to happen from an external testing center, but can also be taken over by an internal department in the company. Of course, external credit audits are also common, for example, when appropriate companies are ordered to do so.
When will credit audits be carried out?
In general, credit audits are carried out at a fixed time interval, so these audits are announced and do not pose a major problem for the company. However, it is also possible that extraordinary events necessitate a credit revision. Then the exams are unannounced and must be approved. If the revision is extremely bad, then it may come to a closure of the bank.
Who checks during a credit audit?
The examiners during a revision are called auditors. You must not be actively involved in the lending business for an objective view. In Germany, all banks have to undergo external credit revisions, for example through auditing firms or association auditors. Compliance with the requirements of Basel 2 and SolvV is the top priority of German credit institutions and is closely monitored. Loans are divided into risk classes of 1 – 5, which the banks must follow.
Classification in risk classes
Five risk classes are defined as a whole, but this is also evaluated differently from bank to bank. Risk class 1 describes harmless, economic conditions of the borrower. There is sufficient collateral to cover the loan. The second risk class already includes loans with an increased default risk, which, however, can not be clearly identified in advance. Risk class 3 states that there is a lack of important documents that should secure the loan and describe the economic situation. The fourth risk class involves economic problems and an increased risk of default, with short-term losses not expected. In the latter class, the default risk is clearly visible.
Completion of the credit revision
At the end of each exam deficits are to be revealed and solutions proposed. The goal is to increase credit security and thus to put the institute on a secure footing. The fact is, of course, that no financial institution can lend without risk. A residual risk also exists for customers assigned to risk class 1. Again, there may be negative developments. Even risk class 4 can develop as unexpectedly reliable and secure, for example, if the borrower gets a better-paying job or inherits a flat. During a revision, one of the central tasks is to monitor and control loans on an ongoing basis. Only in this way can the creditworthiness of the company be improved and monitored. Various valuation standards help in the review, the BaFin sets the minimum requirements.