Page 31 - Risk Management Bulletin Jan- Mar 2022

RMAI BULLETIN JANUARY - MARCH 2022

THE

FUNDAMENTALS

OF CREDIT RISK

MANAGEMENT

AND HOW TO

MITIGATE CREDIT

RISK

fter two years of a Covid-19-induced The mood of the Indian economy has shifted from
slowdown in the Indian economy, there was optimism regarding FY 23 to extreme concern driven
a glimmer of hope in the last quarter of FY by this volatility and uncertainty. In such an
2022. Credit rating agencies reported fewer environment, credit risk increases substantially, and it
downgrades and observed improved credit quality. is imperative to be cautious while granting credit to
Meanwhile, Russia invaded Ukraine on February 24, counterparties.
2022, causing oil and commodity prices to skyrocket
and disrupting supply chains again. Sanctions against What is Credit Risk?
Russia have roiled the international banking and
Credit risk is the possibility that a lender might lose
financial system, disrupting cash flows. The projected
money if a borrower fails to repay a loan or adhere to
shortfall in wheat and edible oils and the potential
contractual obligations. In trade, credit risk refers to
reduction in the flow of crude oil and gas from Russia
the odds that customers purchasing goods, products,
has impacted the global economy. In India, the
or services on credit may not pay their invoices. Credit
Wholesale Price Index (WPI) rose to 14.6% in March
risks are calculated based on a borrower’s ability to
2022.
repay the amount lent to them or a buyer’s ability to
pay for the goods and services purchased.
About the author What is Credit Risk Management?
Credit risk management is the process of assessing and
Mohan Ramaswamy
evaluating credit risk using the 5Cs—credit history,
Founder and CEO
capacity to pay, capital, conditions of the loan/
Rubix
transaction, and collateral offered. Determining the

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