Credit Risk Management is importand in Banking. Credit risk refers to the risk arising out of an individual counter-party (a borrower or a lender) failing to meet or being prevented from meeting its obligations. In other words, this is a risk that a borrower of a bank makes defaults in his/her repayment (of principal and/or interest) obligations in accordance with agreed terms. There is always scope for the borrower to default from his commitments for one or the other reason resulting in crystallization of credit risk to the bank. Credit risk arises most obviously in the potential for default on the part of persons or institutions borrowing.
Credit Risk has two components: transaction risk, and portfolio Risk. We can further divide transaction risk into risk of default and risk of borrower downgraded due to delayed payment or other criteria. Also, we can divide portfolio risk into Concentration Risk, and Intrinsic risk.
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