Risk Consulting
What is Credit Risk?
The potential for loss due to a borrower's inability to make expected payments on a loan or credit arrangement is known as credit risk. This is the chance taken by the lender when they offer credit to someone. Financial institutions
use different approaches to assessing credit risk and determining whether they should give the loan, and what terms to include. Credit risk can be managed through the use of diversification, credit limits, collateral, and other
risk management practices.
“Credit risk is the possibility that a borrower or counterparty will fail to perform on an obligation. It arises whenever a borrower is expecting to use future cash flows to service a debt. The risk that a lender bears is that the borrower will not make
the required payments.” - Investopedia
Types of Credit Risk
Various kinds of credit risk are taken into account by lenders when analyzing a loan request. Some of the more common types of credit risk include:
- Default risk: This is the risk that a borrower will fail to make the required payments on a loan.
- Extension risk: This is the risk that a borrower will need to extend the term of a loan due to financial difficulties.
- Prepayment risk: This is the risk that a borrower will pay off a loan before it is due, potentially causing the lender to miss out on expected interest payments.
- Interest rate risk: This is the risk that changes in interest rates will affect the value of a lender's investment in a loan.
- Liquidity risk: This is the risk that a lender will not be able to sell a loan or other asset in the event that it needs to raise cash quickly.
- Country risk: This is the risk that political or economic events in a particular country will adversely affect a lender's investments in that country.
- Concentration risk: This is the risk that a lender's portfolio is heavily concentrated in a single borrower, industry, or geographic region, making it more vulnerable to changes in those areas.
What we offer in Credit Risk Consulting
There are several important areas we enrich your understanding in credit risk:
- Assessing and evaluating credit risk for businesses and individuals
- Providing recommendations for managing and mitigating credit risk
- Developing and implementing credit risk management strategies and policies
- Analyzing and modeling credit risk using statistical and financial technique
- Providing training and education on credit risk management
- Assisting with the development and implementation of credit scoring systems
- Providing support and guidance on regulatory compliance related to credit risk management.
- Conducting due diligence and credit reviews for mergers, acquisitions, and other business transactions
