What is a Credit Portfolio?
A credit portfolio is an investment portfolio comprised of debts, like home and car loans. Private investors can build credit portfolios, but more commonly they are held by banks and other financial institutions. Typically, other types of investments are held as well to diversify risk, making the chances of catastrophic investment failures less likely. Companies with an interest in building credit portfolios can purchase a variety of loan products to meet their needs.
An individual financial institution has a constantly shifting credit portfolio, including the loans it generates, as well as the loans it buys. Sale of loans on the secondary market is a common practice and many financial institutions do not hold loans very long, as their goal is to turn them over for a profit while avoiding the expense of holding and servicing them. Credit portfolios can include a mixture of loan types from different origins.
Rating organizations typically rate loans by credit risk, and some financial institutions may package loans with a similar rating for sale as a group. Rather than buying individual loans or shares in loans, companies buy large batches of loans. They can choose to retain them, resell them, or break them up and package them in new loan deals. Commonly, banks try to mix loans with poor and good credit ratings together with the goal of getting rid of high risk loans by selling them off in packages buyers cannot resist.
Assembling a credit portfolio requires substantial capital to make new purchases. People make profits from their portfolios in a variety of ways, including interest on the loans, as well as late fees people may pay if they make payments late. The biggest risk is default on the part of borrowers. Banks can pursue a variety of means for recovering funds in the event of a default, including repossessing assets and selling them.
The size of a credit portfolio can vary, depending on the institution. Global trade in loans occurs on a very high volume every day and some financial analysts express concern about the risks of the loan industry, where activities like risky lending decisions can create a ripple effect of risk as the loans are bought and sold. Companies assembling credit portfolios use a variety of measures to attempt to predict and offset risk. Riskier loans tend to come with higher returns and analysts want to balance the desire for profits in a credit portfolio with the need to avoid obviously dangerous investment decisions.
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