Credit Risk
From the definition, credit risk is an aspect where borrowers fail to meet certain obligations about the borrowing terms. Financial institutions like banks are majorly involved in issuing credit facilities like loans, and therefore credit risk is a significant source of business risks for these institutions. Additionally, loans are essential for consideration in banks’ investment portfolios. Thus banks need to cushion themselves from any arising loss through rational decision-making processes (Blommestein and Hans 135). In response to the challenges that loans pose to the business, banks devise various methods to counter credit risk challenges. These approaches aim to create awareness, control the risks, monitor the risk, measure the risk, and ensure that customers access the loans. Banks need to avail enough capital in connection to these associated risks, which will also sufficiently cater to all risks incurred. Bank management should be actively engaged in establishing policies for the control of credit risk to be risk-averse. The move to develop policies for risk aversion is to ensure the continuity of the banks’ project in offering loans to creditors, as this is a significant avenue in raising revenue.
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The risk plan concerning loan award and credit risk should recognize all related objectives to the credit earnings, quality, and, more significantly, the portfolio’s growth. In that case, the bank in question needs to identify potential target markets owing to the availability of bank features in connection to accomplishing the credit portfolio.
Credit risk can significantly impact financial institutions like commercial banks because credit insurance and related derivatives get altered in the payment process. Take, for instance, a scenario where a borrower fails to honor their part of the bargain, and the loan falls due. On the same note, the inflation rate surpasses the expected inflation rate by the bank at the time of lending. The bank in question will have no option but to bear the losses arising from the loss of capital investment and accumulated interest rate (Blommestein and Hans 137). This can happen despite an insurance cover as, at most times, the insurance policy may have different terms concerning inflation and losses due to forfeiture by the borrower. In such a case, the bank gets affected in several ways.
On the one hand, the loss of capital affects the company’s financial base in the sense that the availability of funds for credit is reduced. On the other hand, the bank undergoes a drastic overall loss. Banks should, in all cases, have a solid plan to combat the impact of credit risk, as it may bring overwhelming challenges to the institution.
Banks, in the process of investing in credit through offering loans to their clients, need to ensure that their portfolios are way secure from credit risk. All equities that form part of the business property should be shielded from all risks ranging from market securities, as suggested by the journal (Blommestein and Hans 145). All investors, in all instances, including commercial banks, should engage in businesses carefully by making important yet critical decisions before investing in the portfolios.
Similar Post: Governing Style
Work Cited
Blommestein, Hans J. “Risk management after the Great Crash.” Journal of economic transformation 28 (2010): 131-137.
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Credit Risk
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