Credit risk

The inherent uncertainty in lending, like a gust of wind threatening to capsize a ship, arising from the possibility that a borrower may not fulfill their repayment obligations, potentially leading to financial loss for the lender.

The inherent uncertainty in lending, like a gust of wind threatening to capsize a ship, arising from the possibility that a borrower may not fulfill their repayment obligations, potentially leading to financial loss for the lender.

The inherent uncertainty in lending, like a gust of wind threatening to capsize a ship, arising from the possibility that a borrower may not fulfill their repayment obligations, potentially leading to financial loss for the lender.

Example

When a bank provides a loan to a borrower, it assumes the credit risk associated with the possibility that the borrower may default on their payments. To mitigate this risk, lenders employ various strategies such as assessing credit scores, examining credit history, and evaluating debt-to-income ratios to determine the borrower's creditworthiness. Additionally, they may require collateral or charge higher interest rates for borrowers with higher perceived credit risk.