COLLATERAL MANAGEMENT

A quick overview on collateral management..

Collateral

Collateral is a borrower’s pledge of specific property to a lender. This serves as a lender’s protection against a borrower’s default. Generally, allows the lender to offer a lower interest rate on loans. Reduction in interest rate depend on type and value of the collateral.

Different Types of Collateral

The different types of collateral are

• Corporate bonds
• Cash
• Mortgage backed Securities
• Letter of credit
• Equities
• Real estate
• Government securities

Collateral Management

This is a method of granting, verifying and giving advice on transactions. It identifies changes in the collateral. Lessen the risk involved in unsecured financial dealings. It administers the collateral transactions.

Credit Enhancement

Credit enhancement is a major function in Collateral Management. It is a strategy for improving the credit risk profile of a business. Here credit risk profile is the person who borrows the money. This is strategy used to reduce the risks to investors.
Different types of credit enhancement
# Surety Bonds
# Letter of Credit
# Wrapped Securities

Need of Collateral Management

So here is why we need collateral management…

• Improved credit risk mitigation.
• Increased the number of trading counterparties.
• Easy integration with in-house and legacy systems.
• Strategic global reporting for front, middle and back offices.
• Reduced credit line utilization.

Inter-relationships around Collateral Management

Parties Involved

The parties involved in collateral management are

# Collateral Management Team
# Credit Analysis Team
# Legal Department
# Valuation Department
# Accounting & Finance
# Third Party Service Providers

Real Life Examples

Mortgages
The home or real estate you purchase is often used as collateral when you take out a mortgage.

Car loans
The vehicle you purchase is typically used as collateral when you take out a car loan.

Secured credit cards
A cash deposit is used as collateral for secured credit cards.

Hope this article is useful !!
Thanks for reading.