Frequently Asked Questions
Credit risk tends to occur when the borrower fails to repay the amount of the debt/loan or satisfy the contractual responsibilities. Credit risk management is the process of assessing an entity’s ability to minimize meeting the credit risks, and hence, lowering the chances of excess cash flow along with increased costs of money recovery.
The responsible party for the credit risk can be either the lender or the borrower, but a systematic and thorough understanding of credit risk can help diminish the degree of loss.
Assessing a company’s credit risk can be challenging and time consuming due to differing filing obligations, and inconsistent timeliness, availability and quality of data.
Our innovative and custom-made solutions for credit risk assessment have helped the diverse portfolio of our clients in improving customer response time, enhancing the quality of credit decisions, ensuring compliance, and slashing down the risks associated with internal processes.
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Credit Default
Risk
Credit default risk comes into existence when the
borrower has not paid the loan or has been significantly behind with the due
date of the loan repayment. Credit-sensitive financial transactions that can be
affected by credit default risk are loans, bonds, securities and derivatives.
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Concentration
Risk
When an organization is largely dependent on a
single source or sector for its need fulfillments, it is at higher
concentration risk. If the source fails to meet the demands on time or
delivers low quality materials, then the business functions of the organization
can get highly and negatively affected.
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Country Risk
When a country freezes foreign currency payment
obligations, leading to a default on its obligations, it swiftly runs into
country risk. Country risk is highly dependent upon the country’s political
instability and macroeconomic routine which may severely sensitize the value
of its assets or operating profits. |
There are generally 3 factors that affect credit risk assessment: Probability of Default, Loss Given Default and Exposure at Default.
Probability of Default (POD)
If the lending institution observes that the said corporate comes with lesser chances of default, then it approves the loan with low interest rate and low or no down payment on the loan. The risk can also be managed partially by pledging a collateral against the loan.
Loss Given Default (LGD)
LGD indicates the amount of loss a lender/lending institution goes through when the borrower defaults on the loan. There is no standard practice for calculating LGD. So, the lender/lending institution takes an entire portfolio of loans into consideration to measure the total exposure to loss.
Exposure at Default (EAD)
EAD is the metric to measure the total exposure to loss that a lender is exposed to at any given time of day and its risk appetite.
EAD is calculated by multiplying each loan obligation by a certain percentage adjusted on the basis of the specifics of the loan. Both corporate and individual borrowers are affected by this factor for their credit risk assessment.
For sustainable growth, financial services companies need to turn real-time data into actionable insights. This means firms need to manage data holistically and transform outdated financial risk management processes to ensure speed and accuracy.
We have a vast network of lending institutions that help us in addressing the challenges and opportunities concerning:
- Risk Management
- Model Risk Management
- Regulatory Risk Management
- Customer Remediation
- …and more
Get in touch with us today to sort out your tomorrow!
Credit risk management is the process by which financial institutions can lower or mitigate any possible credit risks in their loan portfolio. They do it using various tools and tactics namely risk rating, setting up credit rating authorities, risk pricing, portfolio management, and loan review mechanisms etc