Managing credit risk in loans is a challenging task banks across the globe are facing today. Banks need to have cost effective credit risk management models and instruments. Credit Linked Notes is one such instrument. This article also throws light on issues involved in developing the credit derivates market in India besides their structures and features.
Deregulation and globalization have introduced new types of risks in banking system. The term, risk may be defined as an exposure to a transaction with loss, which occurs with some probability and which can be expected, measured and minimized. One such important risk is the Credit Risk which arises from the lending activity performed by a bank.
The author opines, "granting credit for economic activities is the prime duty of the banking sector. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which in turn results in economic growth."
Lending carries credit risk, which happens to be one of the most common risks that banks often face and which arises due to the default payments. Thus, these loans, which become non-recoverable, affect the banks' profitability on a large-scale basis. The best example being the Non Performing Assets (NPAs), which are derived from nonpayment of loan borrowed by the party. |
