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Credit Risk

Let’s discuss what does Risk means. Risk is simply called uncertainty. For example, when you lend money to your friend and there is a risk when you are not sure about getting back since he lost his job recently.

Similarly, when you consider banking, their main business is to make people deposit in their bank and lend money to others. Credit risk arises due to uncertainty of collecting back the money from borrowers. Credit risk can be high when the credit quality of the borrower is low. Due to lower credit quality and non-repayment of borrowed loans, Banks can expect losses. These losses are calculated as Expected Loss

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