Introduction to Credit Risk

1. www.loanXpress.com
Introduction
to
Credit Risk

2. 2www.loanXpress.co
m
Sept 2016
What is Credit Risk...??
 Risk – Risk implies future uncertainty about deviation In Repayment of Loan i.e. Principal
or Interest.
 Credit risk - 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.
 Reward - Interest payments from the borrower or issuer of a debt obligation are a lender's
or investor's reward for assuming credit risk.
Customer
Loan/Credit
Principal + Interest
Risk
Uncertainty of
Principal &
Interest Payments
Reward/Return
Interest Income
Risk/Obligation
Repayment of Loan
Reward/Return
Loan Money (Cash)

3. 3www.loanXpress.co
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Sept 2016
When Credit Risk …??
BANKS
• Provides Loans/Credit/Mortgages or other type of loans
• Credit Cards
Company
• Credit to its client/customer
• Receives Credit from Suppliers, Investors, Banks & Financial Institutions
Others
• The risk that a bond issuer may fail to make payment when requested
• An insurance company won't be able to make a claim
• Investor may not receive money owed or invested in company
“Credit risk arises because borrowers expect to use future cash flows to pay current debts; it's
almost never possible to ensure that borrowers will definitely have the funds to repay their
debts...”

4. 4www.loanXpress.co
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Sept 2016
How Is Credit Risk Assessed..?
CHARACTER : An applicant's credit history
CAPACITY: Ability to Repay
CAPITAL : Funds he Owns in form of Share Capital, Shares & Investments.
CONDITIONs : Condition on which loan will be provided by the bank
COLLATERAL : Security provided at the time of availing Credit/loan
5 C’s of Credit Risk

5. 5www.loanXpress.co
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Sept 2016
How Does Credit Risk Affect Interest Rates..?
• “Higher the
perceived Credit risk
higher the interest
rates”
• Depends on ‘Credit
Rating’
Banks
• “Bad Credit History
Leads to Higher
Interest rate”
• E.g.: Bad CIBIL
SCORE
Company
• “Investor/Lenders
demands Higher
returns in form of
Interest”
• E.g.: Unsecured
Loans
Others

6. 6www.loanXpress.co
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Sept 2016
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Website : www.LoanXpress.com