Credit Risk Managment

Essay text:

Business is a trade off between risk and return. There can be no risk-free or zero risk oriented business. Risk in its pragmatic sense, therefore, involves both threats that may be materialised and opportunities which can be exploited. Credit Risk and Default Credit Risk is the risk of loss to the Bank in the event of Default. Default arises due to counterparty's inability and/or unwillingness to meet commitments in relation to lending. Credit risk is the potential loss that a bank borrower or counter party will fail to meet its obligation in accordance with the agreed terms TYPES OF THE CREDIT RISK A) Transaction risk B) Portfolio risk a) Grade risk a) concentration risk b) default risk b) intrinsic risk 1) non payment 2) delayed payment Credit risk may be in the following forms: * In case of the direct lending * In case of the guarantees and the letter of the credit * In case of the treasury operations * In case of the securities trading businesses * In case of the cross border exposure Traditionally credit risk has 2 components a) Solvency aspects of the credit risk-the risk borrower is unable to pay b) Liquidity aspects of the risk-the risk that arise due to the delay in the repayment by the borrower leading to the cash flow problems for the leader The need for Credit Risk Rating The need for Credit Risk Rating has arisen due to the following: 1...