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Credit Risk

Updated on July 18, 2023

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.

What are the factors affecting credit risk?

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.