At Banco Itaú, Brazil’s second-largest private-sector bank, anticipation and control are the principal drivers of credit control systems. The bank began making significant investments in its credit area more than a decade ago, at a time when Brazilian financial institutions earned the biggest part of their income from public bonds and notes and tended to neglect the credit market. Because of the bank’s consistent focus on credit management, Itaú has developed a solid and integrated credit control system and has significant expertise in this area.
In addition to the application of technology in analyzing credit data, it is important to mention that the bank’s credit decision process for all the markets it pursues – from retail to large corporate customers – is centralized and under the same internal matrix. This organizational structure helps to homogenize credit policy concepts across Itaú’s business segments, while at the same time strongly respecting the particularities of each division when it comes to implementing solutions.
Different Markets, Different Strategies
At Itaú, the credit approval process for retail customers depends heavily on credit and behavior scores. For the middle and corporate markets, the process relies on the proprietary rating models. Since each market has different characteristics with regard to credit volume, processes, and operational structure, the bank’s information systems must be capable of controlling the whole process and also assuring that the appropriate credit authority is effective on the credit approval workflow. In spite of the simplicity of the concept of the credit approval control -that no single deal can be approved without its respective credit authority – the characteristics of each market segment require a robust system of control due to the diversity of types of solution.
The retail market at Itaú encompasses millions of clients and pre-approved credit limits are being used very aggressively. With such a system, loans are even being contracted on ATMs. But even in situations such as these, the underlying theme is a credit control system that consolidates all the relevant credit information of a client.
On the other extreme lies the large corporate market, with low volume and high-ticket values. For such a segment, the key principal is the control of the workflow of the credit proposals, which are based on pre-defined credit authority based on the client’s rating and the size of the deal. Both the retail and corporate markets, passing through small and middle markets credit approval, are fully integrated to the control system that assures that no single deal is finalized without the respective accounting records. No matter who the client is, every loan is registered into the central approval system before the money is released. The centralization of such a structure allows management to pilot the money flows to the credit targets, either for restrictive or expansionist policies depending in part on external events. For example, during the Asian and Russian crises and during the devaluation of the Brazilian real, emergency credit policies were defined and implemented on the credit control system in an expedited way, slowing down the credit concession process. It is important to mention that Itaú avoided any relevant credit problems as a result of those crises. The recent credit policy flexibility aimed at portfolio growth was implemented relying on the clients’ rating and new distribution channels, both integrated with the credit control system. As a consequence of the flexibility of the credit policy, Itaú has been using the clients’ rating, especially in the retail market, to improve its mass credit approval. ATMs, the Internet and other self-service channels are being used to provide credit. Once Itaú analyzes clients’ credit ratings and scores, it can estimate the level of the portfolio’s quality variation in a more aggressive credit policy. These tools were an important element in Itaú’s recent credit portfolio growth and are a key factor in a fast-growing market. The Brazilian credit market has huge potential: it now represents about 30% of GDP whereas the same ratio is above 70% in developed economies.
Credit Monitoring System
Itaú’s credit control process goes beyond the decision and formalization steps to one of rigorous and continual evaluation. Especially in the case of growing markets in which the bank is seeking new customers and clients, most of the new loans are for clients with little or no track record with the bank. This makes the presence of a follow-up system for evaluation essential. Banco Itaú’s “red flag system,” based on an internally developed computer system, keeps track of all deals in which the client shows any sign of quality deterioration based on the bank’s internal parameters. This system runs daily, and it is one of the most effective tools used by the bank to monitor mass transactions.
The red flag system has different parameters, each one specific to the market segment under scrutiny. The important aspect of this system is that it triggers specific actions according to the severity of the red flag. The triggers require actions from the back-office to the officer responsible for the client, and the information is broadcast to the different systems involved in the credit infrastructure for incorporation into the client credit quality evaluation, rating or score. The red flag system is also integrated into the comprehensive control system and eases the evaluation and redirection of the credit policy should it be necessary.
The system can detect the deterioration of clients or a group of clients with the same characteristics. Therefore, specific analysis can be made on those samples to identify whether new loans should be approved to clients with the same profile. Moreover, no further credit is given to those clients with negative reference issued by the red flag system.
Defaults and past-due loans are events that trigger action by the bank. Every past-due loan, according to specific rules on late payments, automatically triggers a process of recovering the due amount. This process is also integrated into the overall credit control system, which feeds back to the other processes that incorporate behavioral information into their analysis.
The liquidation of a loan plays a significant role within the credit control infrastructure at Banco Itaú. These events are also recorded and integrated into the rating or scoring processes, enhancing the quality of the available data and leveraging the development of the bank’s proprietary models.
Every single loan made by Banco Itaú is directed into the credit control system so that every client has their outstanding position with the bank clearly stated and blended with a set of qualitative information such as their rating or score, relevant behavioral information and restrictions.
Still, regarding an overall perspective, the bank’s Global Credit Portfolio management, which includes the positions of all foreign agencies, subsidiaries and units, and the local banks that are part of the Itaú conglomerate, is closely connected with the management of the credit decision process and vice-versa. Since the decision process is centralized, the decision-making process considers the impact on the whole portfolio. Such global focus allows management to pursue the most effective decision-making process and maintain high-quality control standards.
The bank understands that it has excellent growth opportunities in the Brazilian retail segment. To effectively and profitably reach these customers, it must apply a multifaceted approach to credit. Mass criteria and evaluation processes are important, but not enough to assure consistent growth. The bank must also apply an aggressive credit concession process and a meticulous monitoring system, as well as an effective delinquency system. This is necessary because some degree of credit deterioration is always expected to accompany fast growth.
Kumagae Hinki-Junior is general manager of Banco Itaú’s credit risk management division.