{"id":242932,"date":"2020-09-03T13:49:06","date_gmt":"2020-09-03T13:49:06","guid":{"rendered":"https:\/\/imarticus.org\/?p=242932"},"modified":"2023-08-31T18:38:19","modified_gmt":"2023-08-31T18:38:19","slug":"purpose-of-credit-risk-analysis","status":"publish","type":"post","link":"https:\/\/imarticus.org\/blog\/purpose-of-credit-risk-analysis\/","title":{"rendered":"Purpose of Credit Risk Analysis"},"content":{"rendered":"

What is Credit Risk?<\/strong><\/h3>\n

Risk is a part and parcel of conducting business, the degree and types of risk vary depending upon the nature of business. Credit risk can be explained as the risk of loss arising due to the failure of a borrower to meet its loan obligations. In simpler terms, when a borrower is not able to repay the loan amount as per the terms and conditions of the agreement, a credit risk situation arises. Credit risk is far too common in the banking and finance industry and an increase in credit risk leads to loss for banking and financial institutions. It also severely impacts the cash-flow of the business.<\/p>\n

Credit Risk Analysis<\/strong><\/p>\n

Now to tackle the situation of huge losses arising on account of credit risk, banks and financial institutions who are primarily involved in lending money takes all necessary measure to mitigate and reduce the risk. Credit risk analysis can be understood as a measure to mitigate credit risk. The credit risk analysis process involves assessing the probability of loss due to default by the borrower. It also evaluates the actual amount and extent of loss that will arise when the borrower fails to meet his\/her repayment obligations as per the terms of the loan agreement.<\/p>\n

Credit risk analysis is primarily carried out by banks, financial institutions and NBFCs as they are primarily involved in the process of loaning out funds for various needs. In addition to this, insurance companies and bond issuers also need effective credit risk analysis to minimize loses and boost profitability. Effective credit risk analysis helps to ease the lending process and this is much needed in the current digital economy where customers don\u2019t like to wait long for goods and services. Credit risk analysis is an indispensable process for all major financial and banking institutions that deal in a large volume of loans and monetary transactions.<\/p>\n

Why Conduct Credit Risk Analysis?<\/strong><\/p>\n

Now that we have a complete understanding of what credit risk analysis is let\u2019s delve deeper into why is it important to conduct credit risk analysis and how it helps.<\/p>\n