Credit Risk Management

INTRODUCTION

Peter L Bernstein in his celebrated book, “Against the gods-the remarkable story of risk”, states that,” in the dark ages risk was always associated with god. As the mankind progressed and business and markets grew, the art of risk management grew from primitive stages to the modern day rocket science”.

Risk is an inherent component of our life, be it business or personal life. The one who is able to manage it properly emerges the winner. In simple terms, risk can be defined as any uncertainty about a future event that threatens the organization’s ability to accomplish its mission. Business is a trade between risk and return.

WHAT IS RISK

Recalling our earlier statements, we can say that risk means different things to different people. For some it is “financial” (exchange rate, interest –call money rates), and for others,” an event or commitment which has the potential to generate commercial liability or damage to the brand image”. Since risk is accepted in business as a trade off between reward and threat, it does mean that taking risk brings forth benefits as well. In other words, it is necessary to accept risks, if the desire is to reap the anticipated benefits. Risk in its pragmatic definition, therefore, includes both threats that can materialize and opportunities which can be exploited. This definition of risk is very pertinent today as the current business environment offers both challenges and opportunities to organizations, which have to manage to their competitive advantage. Risk management is a discipline that deals with the possibility that some future event will cause harm. The Proper management of risk provides strategies, techniques, and an approach to recognize and confront any threat faced by an organization that seeks fulfills its mission.

OBJECTIVES OF RISK MANAGEMENT

While discussing the basic objectives of a risk management function, one speaks about managing risks, maximizing profitability and creating opportunity out...