Question: Why and how does the Credit Risk Measure become so important in

Commercial Bank Management? Evaluate in brief.

Answer: Credit risk is most simply defined as the potential that a bank borrower or
counterparty will fail to meet its obligations in accordance with agreed terms. In other words,
credit risk can be defined as the probability that some of the bank’s assets will decline in
value and perhaps become worthless.
Credit Risk Measures:
• Non-performing Loans/Total Loans
• Net Charge-Offs (Written Off Loans)/Total Loans
• Provision for Loan Losses/Total Loans
• Provision for Loan Losses/Equity Capital
• Total Loans/Total Deposits
Loans make up the biggest risk for any bank .The credit risk management is one of the core
processes for banks hence the ability to manage its process is essential for their success.
Banks are constantly faced with risks all the time; risks are always associated with banking
activities and taking risks is very common in banking. To ensure their healthy financial
status, banks must balance their risks daily by having a formal credit risk management
practice in place.
Credit management is an important aspect of financial management for all banks. The proper
management of credit will enhance the bank’s profitability, hence increasing the wealth of the
shareholder and ensure that the bank generates sufficient positive credit from its operations to
continually fund the deposit and lending activities. Therefore, the efficient management of
credit will solve problems and save time. To ensure the positive growth of the bank, credit
risk management must play a role in managing the risks.