WEEK 3 - CREDIT RISK Flashcards
is when a lender lends money to a borrower but may not be paid
back.
Credit Risk?
Credit risk management is a multi-step process, but it can broadly be split into two main
categories. They are:
- Measurement
- Mitigation
are extended to borrowers based on the business or the individual’s ability to service future payment obligations (of principal and interest).
Loans
is an ongoing assessment process that protects your business against late or non-payments and improves your financial health.
Credit risk management
help to maintain cash flow and elevate the efficiency of your business.
Credit risk management best practices
Crucial factors to consider for credit assessment and scoring
- Financial health
- Payment history
- Business stability
- Industry risks
- Business news
Six most efficient credit risk management best practices
- Provide online application forms
- Analyze and predict credit risk
- Real-time credit risk monitoring
- Establish and follow a credit policy
- Use clear communication for payment terms and conditions
- Leverage automation for fast and accurate credit risk management
5 C’s of Credit
- Character
- Capacity
- Capital
- Collateral
- Conditions
describes company management’s reputation and credibility; also extends to company ownership if it’s a private corporation.
Character
speaks to a borrower’s ability to take on and service debt obligations. For both retail and
commercial borrowers, various debt service and coverage ratios are used to measure a borrower’s
capacity.
Capacity
is often characterized as a borrower’s “wealth” or overall financial strength. Lenders will
seek to understand the proportion of debt and equity that support the borrower’s asset base.
Capital
is a very important part of structuring loans to mitigate credit risk.
Collateral
refer to the purpose of the credit, extrinsic circumstances, and other forces in the external environment that may create risks or opportunities for a borrower.
Conditions
is a measurement of a person or business entity’s ability to repay a financial obligation based on income and past repayment histories. Usually expressed as a credit score, banks and lenders use a credit rating as one of the factors to determine whether to lend money.
Credit rating
help the market to effectively and efficiently evaluate and assess credit risk, price debt securities, benchmark issues and create a robust secondary market for those issues.
Credit rating
is an assessment of the creditworthiness of individuals and corporations. It is based
upon the history of borrowing and repayment as well as the availability of assets and extent of
liabilities.
Credit rating
indicates a high risk of defaulting on a loan and thus, leads to high-interest rates or the refusal of a loan by the creditor.
poor credit rating
will directly address the need for reliable credit information concerning the credit standing and track record of borrowers.
Credit Information System
Credit Information System created the _____________, whose primary purpose is to receive
and consolidate basic data on the credit history and financial condition of borrowers.
Credit Information Corporation
The primary function of a credit registry (Credit Infomation Corporation): to monitor __________ by every
individual and financial institution with credit facilities.
loan transactions
