RISK ANALYSIS IN LENDING

Meaning of risk analysis

Risk Analysis is a process that helps you identify and manage potential problems
that could undermine key business initiatives or projects.
To carry out a Risk Analysis, you must first identify the possible threats that you
face, and then estimate the likelihood that these threats will materialize.
Risk Analysis can be complex, as you'll need to draw on detailed information such
as project plans, financial data, security protocols, marketing forecasts, and other
relevant information. However, it's an essential planning tool, and one that could
save time, money, and reputations.

Meaning of risk analysis in lending

Credit risk analysis is assessing the possibility of the borrower’s repayment failure
and the loss caused to the financer when the borrower does not for any reason
repay the contractual loan obligations. Interest for credit-risk assumption forms the
earnings and rewards from such debt-obligations and risks.

Banks, financial institutions and NBFCs offer mortgages, loans, credit cards etc
and need to exercise utmost caution in credit risk analysis. Similarly, companies
that offer credit, bond issuers, insurance companies, and even investors need to
know the techniques of effective risk analysis.

In all the above scenarios risk analysis of the credit or obligation being offered is
very important to be prepared for risk management, mitigation and recovery of the
loans/obligations. Borrowers too need to monitor their credit ratings to be eligible
for a lower rate of interest and loan eligibility. Improving your credit score ensures
you get even unsecured or collateral-free loans at low-interest rates.

Types of risks associated with bank lending

There are two main types of risks associated with bank lending. First is default
risks arising out of non-payment of interest and principal by borrowers.
This risk is mitigated by stipulating higher margins from the borrowers and
obtaining mortgage of property by way of collateral security.
The second type of risk arises due to changes in Rate of Interest affecting bank
profitability. Banks cushion it through increasing their non-interest income through
bill, treasury, custodial and merchant banking services.
Besides there are other types of risks in bank lending like mortgage, theft and fraud
risks. These risks are covered through various insurance and legal measures.

Banks: Loans and advances

The money a bank lends to a customer may not be repaid due to the failure of a
business. It may also not be repaid because the market value of bonds or equities
may decline due to an adverse change in interest rates or a downturn in the
economy. Another reason for non-repayment is that the counterparty may default
on the derivative contract. These types of risks are inherent in the banking
business.
Types of bank risks
There are many types of risks that banks face:
 Credit risk.
 Market risk.
 Operational risk.
 Liquidity risk.
 Business risk.
 Reputational risk.
 Systemic risk.
 Moral hazard.