The term credit risk
denotes all those losses that are caused because of the defaults by borrowers in repaying the loan amounts that are provided to them by the banks or other financial organizations. Arranging finance for almost every reason is not a tough job in today’s market. There are a large number of financial companies and banks to provide money in form of mortgage loans, personal loans, home loans and so on. Now, there are several borrowers who become unable to pay back the loan amount to the lenders within the specified time. At the same time, there are several business loans that are provided to the business houses and sometimes these loans also cause credit risk for lending institutions.
The credit risks are not only related to the banks or the lending institutions. Individuals as well as businesses are also subjected to credit risk but of different kind. In several businesses, there exists a tradition and that is to provide the services and products before getting any kind of payment. Through these kinds of transaction practices the businesses are actually exposed to credit risk for the period between delivery of the product or service and receiving payment for the same.
At the same time, the credit risks are also faced by several individuals. When an individual keeps money in any bank or invests money in securities market or real estate and so on, the individual is exposed to credit risk. If the individual is lending money to others for any purpose then also the individual is subjected to credit risk. On the other hand, every individual employee is subjected to credit risks because of the unstable economic condition of their employers.
There are several preventive measures that are taken by the financial companies, banks, businesses and individuals for covering the credit risks. Banks or financial institutions generally evaluate the financial efficiency of the customers through several processes and credit records. The financial institutions lend money after being sure about the financial status of the clients. In case the loan is not secured or the lender is having default history, the interest rate on the loan goes higher.
On the other hand, the business houses use different types of modern programs and even credit risk department to prevent the losses. At the same time, the payment terms and conditions are also modified to minimize the credit risks. Again, the governments take care to provide the individuals with a genuine coverage against credit risk so that the investment habits of the individuals can be encouraged.