Credit risk is defined as the failure of a counterparty of a financial agreement to meet its obligations in accordance with the decided terms. This counterparty could be anyone ranging from an individual borrower to a corporate or any other statutory body. And accordingly, credit risk also comes in different forms like personal finance, vehicle loans, derivatives, interest swaps, infrastructure loans—the list is long. Not just the corporates, but also the financial institutions are well aware of the benefits and the need for managing credit risk.

In the era of the Enron Debacle and WTC – 9/11, where companies are prone to various risks, the institutions giving credit to the companies have to be more alert in granting and managing credit. It is very necessary to take into consideration the relationship between credit risk and other forms of risk as they bear an impact on the overall credit paying capacity of the borrower. Effective management of credit risk is vital for the long-term success of any organization. Companies have felt the need to identify, measure, monitor and control credit risk as well as to be capable enough to fight against any credit contingency that may crop up in due course of time.

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