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Dilfraz Singh, Lovely Professional University Unit 5: Credit Risk Management

Unit 5: Credit Risk Management Notes

CONTENTS
Objectives
Introduction

5.1 Risk Management
5.1.1 Functions of Risk Management
5.1.2 Categories of Risk

5.2 Credit Risk
5.3 Managing Credit Risk
5.3.1 Tools of Credit Risk Management
5.3.2 Risk Rating Model
5.3.3 Principles for the Management of Credit Risk

5.4 Approaches to Credit Risk Measurement: Intrinsic Risk
5.4.1 Expert Systems
5.4.2 Credit Rating

5.4.3 Credit Scoring
5.5 Summary
5.6 Keywords
5.7 Review Questions
5.8 Further Readings

Objectives

After studying this unit, you will be able to:
Discuss the meaning and functions of risk management

Identify the categories of risk
Explore the definition of credit risk
Explain the managing of credit risk
Describe the approaches to credit risk measurement

Introduction

Credit risk is the risk that a borrower will not repay a loan according to the terms of the loan,
either defaulting entirely or making late payments of interest or principal. Credit risk is most
simply defined as the potential that a bank borrower or counterparty will fail to meet its
obligations in accordance with agreed terms. The goal of credit risk management is to maximise
a bank’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable
parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the

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