Simplifying SAP Risk Analyzers Part 1: Credit Risk

Enhancing Credit Risk Management for XYZ Corporation

Background:

XYZ Corporation, a large multinational company, regularly engages in significant financial transactions, including loans, derivatives, and trade receivables. To ensure financial stability and protect against potential losses, the company needs a robust system to manage and mitigate credit risk effectively.

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Challenge:

XYZ Corporation faces the risk of counterparties (customers, suppliers, or financial institutions) failing to meet their financial obligations due to a decline in their credit standing. This counterparty risk could lead to substantial financial losses if not managed properly.

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Solution: Implementing SAP Credit Risk Analyzer

XYZ Corporation decides to implement the SAP Credit Risk Analyzer (TRM-CR) to actively control and mitigate credit risk through three key functions: Attributable Amount Determination, Limit Management, and Limit Utilization Testing.

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Key Functions and Their Application

Attributable Amount Determination:?

Objective: Calculate the potential loss amount for each receivable that is subject to default risk.

Application:

XYZ Corporation calculates the attributable amount using the net present value of future cash flows from receivables.

For example, if XYZ Corporation expects to receive $1 million from a customer over the next year, the Credit Risk Analyzer calculates the present value of these payments considering the risk of default.

Limit Management:

Objective: Set and manage limits to control exposure to individual counterparties and other relevant criteria.

Application:

XYZ Corporation sets up different limit types based on various characteristics such as:

Company Code: Limits the exposure for each subsidiary.

Business Partner: Limits the credit exposure to each customer or supplier.

Trader: Limits the exposure based on the activities of individual traders.

Currency: Limits exposure in different currencies to manage forex risk.

For instance, XYZ Corporation sets a limit of $5 million for any single customer to prevent excessive risk concentration.

Limit Utilization Testing:?

Objective: Monitor and ensure that transactions do not exceed the pre-defined credit limits.

Application:

Integrated Single Transaction Checks: Each new transaction is checked against the limits in real-time during its creation or modification.

Example: If a trader initiates a transaction that would push the exposure above the $5 million limit for a customer, the system blocks the transaction or raises an alert.

End-of-Day Processing: All transactions are re-evaluated at the end of each day to ensure ongoing compliance with limits.

Example: Daily assessment of all receivables to ensure that overnight changes in counterparties' credit standings are accounted for.

Benefits:

Proactive Risk Management: By continuously monitoring and controlling credit exposure, XYZ Corporation can take timely actions to mitigate risks.

Informed Decision-Making: Accurate calculation of attributable amounts and real-time limit checks provide the finance team with the necessary information to make sound financial decisions.

Regulatory Compliance: Ensures adherence to regulatory requirements and internal risk policies.

Conclusion:

Implementing SAP Credit Risk Analyzer enables XYZ Corporation to enhance its credit risk management processes significantly. By effectively determining attributable amounts, managing limits, and rigorously testing limit utilization, the company can safeguard against potential credit losses and maintain financial stability in a dynamic business environment.

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