Definition of Credit Risk

Credit risk can be defined as the risk that a lender will not receive the promised cash flows related to the amount lent to a borrower. In other words, it is the risk that the borrower might get defaulted. This feature is very important in the banking sector as the institution has to make sure that the amount lent is invested with a client that is not going to default.


To do that bank hires professional risk assessors who make sure to secure some of the properties of the borrower as collateral before passing the money to the borrower. In the event, a borrower defaults the amount of the loan is recovered by selling the property secured.

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