Credit risk refers to the potential for financial loss that arises when a borrower fails to fulfill their repayment obligations according to the agreed terms. It is the risk that a borrower may default on their loan or debt obligations, resulting in the lender suffering a loss. Credit risk is a significant factor in lending and investing decisions, as it directly impacts the likelihood of receiving expected payments and the overall profitability and stability of financial institutions and investors.
A few factors affecting credit risk are highlighted below.
Borrower-Specific Factors – The borrower’s financial condition, debt service capacity, and creditworthiness impact credit risk.
Macroeconomic Factors – Economic conditions and the regulatory environment can influence credit risk.
Industry-Specific Factors – Industry performance and the competitive landscape affect credit risk.
Credit-Related Factors – Credit ratings, loan characteristics, and concentration risk contribute to credit risk.
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