Cultural Aspects of Credit Risk Management

A Lesson from the Microfinance Industry

Rahnuma Ahsan, PhD, MBA

With a 9.2% unemployment rate and increasing default rates, credit risk management has become more difficult than ever. In October 2009, Bloomberg reported that the number of U.S. lenders with a 20% default rate is at an 18-year high. For commercial real estate mortgages, the default rate during the first quarter of 2010 (4.17%) was at its highest level since 1992, and this figure does not include bank-held mortgages on apartment buildings. In February 2009, the Obama administration launched a Home Affordable Modification Program (HAMP) to assist defaulting real estate borrowers. In June 2010, the Wall Street Journal reported that the redefault rate within one year under HAMP, predicted by Fitch Ratings Ltd., would be 65% to 75%. These disparate perspectives of the credit crisis draw a challenging picture for overall credit risk management.