As Asia begins to emerge from the financial crisis, there is consider-able talk about freeing banks from the legacy of bad lending but much less about how to prevent the bad lending itself. A bath of bad loans is being emptied, yet the current lending behavior of many banks suggests that not enough is being done to turn off the taps.

Many banks failed in the crisis, and many others are technically bankrupt, largely as a result of poor lending practices—particularly in commercial lending, the dominant element of most loan books. To improve the quality of such loans, banks must have suitable risk assessment systems.

Experience suggests that generic solutions don’t work; any system must therefore be designed for the country where it will operate (see sidebar, "First things first."). To create such a system, it is necessary to answer two key questions: how good is the judgment of the current credit officers, and what is the quality and availability of the information (financial and nonfinancial) that can be used to assess risk quantitatively? The responses largely determine the type of risk assessment system that should be developed.

Banks in emerging markets generally employ credit officers with...