Session 4: Credit Portfolio Costs and Managing Performance | Sessions | Mission & Metrics: Finance Training for Federal Credit Program Professionals

Extending credit involves more than getting money out the door in a timely manner. There are widely used techniques and tools for managing credit portfolios efficiently and prudently, and also for measuring program effectiveness. In this session, focus is on the the information necessary for managing performance including the functions associated with extending credit, the costs, the range of choices in performing the functions and the benchmarking of performance. The session is not about Information Technology, but rather how to think about the dynamics of credit-related activities. From the standpoint of the agency budget, such activities are generally funded out of the administrative budget. Session also includes an overview of methods for identifying, assessing and managing credit risk. Finally, this session addresses the metrics that can be used to identify program impact and effectiveness. Together such metrics provide a general basis for performing program cost-benefit analysis.

Operating Cost

There are seven basic functions in the extension of credit: Marketing, origination, underwriting, closing, servicing, monitoring and exit. This session explores:

Importance and costs of each function Unit cost analysis
The benefits delegating, outsourcing or sharing the functions
Technological advances Reducing operating costs through limiting volume and asset sales

Credit Losses

In order to assess risk in a portfolio, program manager relies on a well-defined set of definitions, risk assessment tools and reporting protocols.

What sort of credit risk are we taking?
Key problem: the loss curve
The weak links in the lending process
Credit scoring
Definitions: delinquency, modificaton, default, recovery and other key categories
Rating the loans and reserving percentages
The concept of the credit audit

Performance Measurement and Evaluation

Key metrics in portfolio management:

Internal performance measures
External performance measurement: comparative analysis with the private sector

Interactive

How many credit functions do we wish to keep in-house and what is the cost-benefit?
Going from a flawed private sector solution to a federal direct lending solution. The trade-off between operating costs (and practices) and mission objectives coupled with the difficulty of defining delinquency and default.