When a business or individual borrower fails to satisfy their loan commitments, credit risk occurs. It is the likelihood that a lender will not obtain the principal and interest payments required to fulfill the debt granted to a borrower. Credit risk will interrupt the lender’s cash flows and increase collection expenses, as the lender may be required to hire a debt collection agency to enforce the collection. The lender may suffer a partial or total loss if a portion of the loan or the full loan issued to the borrower is lost. Become good at money lending in toa payoh.
1. The danger of credit default
Credit default risk develops when a borrower is unable to pay the loan obligation in full or when the borrower is more than 90 days past the loan repayment due date. All credit-sensitive financial transactions, such as loans, bonds, securities, and derivatives, may be affected by credit default risk.
2. The danger of concentration
Concentration risk is the level of risk associated with exposure to a single counterparty or sector, and it has the potential to result in huge losses that could jeopardise the lender’s main operations. The risk stems from the finding that highly concentrated portfolios lack diversity, resulting in more linked returns on underlying assets.
3. Country danger
Country risk is the danger that a country will default on its debts if it freezes its foreign currency payments obligations. The risk is connected with the country’s political insecurity and poor macroeconomic performance, which may hurt the value of its assets or operating earnings. Changes in the business environment will have an impact on all enterprises operating inside a specific country.
Credit Risk Modeling Influencing Factors
Lenders should forecast credit risk more accurately to reduce the level of credit risk. Some of the elements that lenders should consider when determining credit risk are as follows:
1. Default Probability (POD): The probability of default, often known as POD, is the likelihood that a borrower will fail to meet their loan commitments.
2. Loss Assumed Default (LGD): The amount of damage that a lender will incur if a borrower fails on the loan is referred to as the loss given default (LGD).
3. Default Exposure (EAD): Exposure at Default (EAD) measures the amount of loss exposure that a lender is exposed to at any one time and is an indicator of the lender’s risk appetite.
These are the major risks and factors that are affected to money credit.