Advanced Credit Risk Analysis and Management

3

Credit Risk Management

Elimination of credit risk is impossible as long as credit forms an integral part of the economy. The organization should manage credit risk in such a manner that it does not spiral out of control. In the meantime, the organization faces other types of risks too. Where does credit risk stand among them?

Let us now establish the context of credit risk, for an organization as a whole, and see how credit risk management is set up. Sound credit risk management presupposes the presence of a good system of credit analysis that will prop up the credit risks to be dealt with. An organization that manages credit risk well will succeed and attain its business objectives – this is true for both financial intermediaries and non-financial firms.

3.1 STRATEGIC POSITION OF CREDIT RISK MANAGEMENT

The importance of the role of credit risk management within the broad framework of an organization is a function of the credit exposure a business takes in its day-to-day operations. Financial intermediaries who are active in the credit market provide utmost importance to this function. However, even financial intermediaries who put credit risk management in the top slot are also exposed to other risks such as liquidity risks, market risk and so on. In non-financial businesses, there are other risks, which take priority over credit risks. For instance, in a pharmaceutical company, quality risk may be the most important although credit risk is a matter of concern so far as the ...