Credit risk: So far so good

07 November 2003

While taking a journey through the world of credit risk, Mitali Kalita discovers that the survivors are the ones who make the quick, mature and right decision at the right time

Chennai: Managing credit risk has always been the most risky business in the financial services industry. If we look back into the past, we will find that poor management of credit risk was the root cause behind most of the major banking disasters.

Being the oldest risk in the market, it was not given much attention and almost remained aloof to the advent of technology until the late 1990s. With the introduction of banking regulations, there is an awareness in the industry now to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against this risk. Credit risk not only affects the lenders but also any company that receives funds for products or services.

After operational risk, the biggest challenge facing the industry is credit risk because large-scale borrower defaults may even force a bank into bankruptcy. As the market has turned increasingly competitive with the mushrooming of new players, it is quite evident that companies are taking on more credit risk. But for a more transparent market and healthy competition, the financial services industry must turn credit risk into an opportunity.

This article takes a journey through the world of credit risk. It gives readers a view of how to manage the most significant risks and lists the challenges and benefits of implementing a credit risk management practice across an enterprise. The article concludes with a glimpse of the current scenario regarding the evolving trend of credit risk mitigation.