Chapter 1
Introduction to credit
risk management
Lending has always been the primary function of banking, and accurately
assessing a borrowers creditworthiness has always been the only method
of lending successfully.
The method of analysis required varies from borrower to borrower. It also
varies in function of the type of lending being considered.
For example, the banking risks in financing the building of a hotel or rail
project, of providing lending secured by assets or a large overdraft for a
retail customer would vary considerably.
For the financing of the project, you would look to the funds generated by
future cash flows to repay the loan, for asset secured lending, you would
look at the assets, and for an overdraft facility, you would look at the way
the account has been run over the past few years.
In this book on credit risk management, we will be looking specifically at
the appropriate methods of analysis for lending to companies, a subject
more often known as corporate credit.
What is the role of credit analysis?
Credit analysis supports the work of marketing officers by evaluating
companies before lending money to them.
This is essential so that new loan requests can be processed, a companys
repayment ability assessed, and existing relationships monitored.
The extent of the credit analysis is determined by
the size and nature of the enquiry,
the potential future business with the company,
the availability of security to support loans,
the existing relationship with the customer.
The analysis must also determine whether the information submitted is
adequate for decision-making purposes, or if additional information is
An analysis can therefore cover a wide range of issues.
For example, in evaluating a loan proposal for a company, it may be
necessary to:
obtain credit and trade references,
examine the borrowers financial condition,
consult with legal counsel regarding a particular aspect of the draft
loan agreement.
By making these checks you are ensuring that your report does not look
at a companys creditworthiness in a narrowly defined sense. You will be
taking the further step of deciding whether the provisions in the loan
agreement are appropriate for the borrowers financial condition.
Often it will be necessary for the analyst to place the assessment of the
borrowers financial condition within the wider context of the conditions
existing in the industry in which it is operating.
For example: Is the companys business cyclical or counter cyclical? How
will this affect the long-term cash flow of the firm? What are the consid-
erations of general economic conditions and, if appropriate, political
conditions in the country where the company is operating?
Credit Risk Management

Get Credit Risk Management now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.