Credit risk is the risk that a borrower may not repay a loan, resulting in potential loss for the lender. It is assessed through factors like the borrower's credit history and capacity to repay, and can be mitigated through methods such as risk-based pricing, covenants, and credit insurance. Various organizations, including India's ECGC, help cover credit risk, while solutions like credit limits and factoring can further manage this risk.

2. WHAT IS CREDIT RISK
• Credit risk refers to the risk that a borrower
may not repay a loan and that the lender
may lose the principal of the loan or the
interest associated with it. Credit risk arises
because borrowers expect to use future cash
flows to pay current debts, also the foreign
buyers inability to make the payment due to
insolvency or default also result in credit risk.

3. EXAMPLE OF CREDIT RISK
• A CONSUMER FAIL TO MAKE A PAYMENT DUE
ON A MOTORAGE LOAN CREDIT CARD OR ANY
OTHER LOAN.
• AN INSOLVENT INSURANCE COMPANY DOES
NOT PAY A POLICY OBLIGATION.
• AN INSOVENT BANK WON’T RETURN FUNDS
TO A DEPOSITOR.

4. How Is Credit Risk Assessed?
• Credit risks are calculated based on the
borrowers' overall ability to repay. To assess
credit risk on a consumer loan, lenders look at
the five C's: an applicant's credit history, his
capacity to repay, his capital, the loan's
conditions and associated collateral.

5. • Credit default risk – The risk of loss arising from a debtor
being unlikely to pay its loan obligations in full or the debtor
is more than 90 days past due on any material credit
obligation; default risk may impact all credit-sensitive
transactions, including loans, securities and derivatives.
• Concentration risk – The risk associated with any single
exposure or group of exposures with the potential to produce
large enough losses to threaten a bank's core operations. It
may arise in the form of single name concentration or
industry concentration.
• Country risk – The risk of loss arising from a sovereign state
freezing foreign currency payments (transfer/conversion risk)
or when it defaults on its obligations (sovereign risk); this
type of risk is prominently associated with the country's
macroeconomic performance and its political stability.
TYPES

6. Lenders mitigate credit risk in a number of ways:
Risk-based pricing – Lenders may charge a
higher interest rate to borrowers who are more likely
to default, a practice called risk-based pricing.
Covenants – Lenders may write stipulations on the
borrower, called covenants into loan agreements
Credit insurance and credit derivatives – Lenders
and bond holders may hedge their credit risk by
purchasing credit insurance or credit derivatives.
These contracts transfer the risk from the lender to
the seller (insurer) in exchange for payment. The
most common credit derivative is the credit default
swap.
MITIGATION

7. ORGANIZATION COVERING CREDIT RISK
There are more than 40 organizations covering the
credit risk, all over the world.
In India we have ECGC of India Limited to cover
export credit risk. This is a Government of India
enterprise, with its Head office located in Mumbai,
under the administrative control of the Ministry of
Commerce.

8. SOLUTIONS FOR CREDIT RISK
• CREDIT INSURANCE-
It is special type of loan which pays back a
fraction or whole of the amount to the
borrower.
It protects open account sales against
nonpayment resulting from a customer’s legal
insolvency or default.

9. • ESTABLISH CREDIT LIMITS
To set credit limit for a new customer, you can use
tools such as:
 Credit-agency reports, which can provide
comprehensive information about a company’s
financial history.
 Bank reports, which should give details of the
bank’s relationship with the company, the
company’s borrowing capacity and it’s level of debt.
 Audited financial statements, which can provide a
good view of the business’ liquidity, profitability and
cash flow.

10. • Factoring
To do this, you sell your receivables to a factoring
company for it’s cash value, minus a discount. This
gives you your money immediately because you
don’t have to wait for payment- the customer will
pay the factoring company instead.