Money is the mother of banks and banks are the reformer of money.
Credit risk
Credit risk means the risk that the promised cash flows from loans and securities held by Fls may not be paid in full.
Credit risk involves the danger that a banks extensions of credit will not pay out as promised reducing the bank’s profitability and threatening its survival.
Credit risk is the risk of financing loss arising from the violation of commitment by an obligor. It arises not only from direct lending, trade finance and lease finance but also from off-balance sheet products such as guarantees, acceptance and endorsement, letter of credit etc.
Measurement of credit risk
Ratio analysis
Risk rating system
Default risk model
Credit risk management
The bank manages its credit risk in the following manners-
Creating credit risk awareness culture
Approved credit policy by the board of directors
Separated credit risk management division
Formation of law and recovery team
Independent internal audit and access to board/audit committee
Large loan limit and credit facility on business consideration
Credit quality and portfolio diversification
Early warning system
Provision and suspension of interest
Risk assets portfolio
Counterparty credit rating
Forward contract
A forward contract is particularly simple derivatives. It is an agreement to buy or sell an asset at a certain future time.
Future or futures contract
A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price. Unlike forward contracts, futures contracts are normally traded on an exchange.
