The impact of inaccurate credit information on bank's secured lending

Abstract

Credit risk has been identified as the main risk that can result in the failure of a bank due to ineffective credit decisions. It is, therefore, critical for the banks to conduct credit risk assessment on new applicants and existing customers in order to determine the level of affordability and mitigate credit risk. Consumer credit information plays a very important role in credit risk assessment because it can accurately detect and predict default. The aim of this study was to investigate the consequences of inaccurate credit information on bank’s secured lending division. The investigation was conducted using various methods to achieve the objectives of this research. This was done through the exploration of literature review relating to research of the management of consumers credit information in developed and developing countries, and secured lending and inaccurate credit data. A quantitative research methodology was adopted. It was observed that credit risk is seen as the key risk that banks are faced with. It was found that inaccurate consumer credit data can have a negative impact on bank’s operations in terms of consumer’s disputes, higher pricing and consumer overindebtedness. In addition, inaccurate consumer credit data impede access to credit by consumers. One of the general recommendations of this research is that banks should assist in training the consumers to improve their knowledge of credit report. Further studies in the area of corporate or business clients are also recommended as the focus of this research was on individual bank’s clients.