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Submitted by tulsiteddy on April 10, 2008
Category: Business
Words: 872 | Pages: 4
Views: 135
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CREDIT RISK MANAGEMENT
"Ships are safe in harbour
but they are not meant for that
banking is business of taking
informed and calculated risk"
The business of banking means
"accepting of deposit for the purpose of onward lending"
Risks in Business
Risk can be defined as any uncertainty about a future event that threatens the organisation's ability to accomplish its mission. 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...
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