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Credit Risk

The risk that a party to a contractual agreement or transaction will be unable to meet its obligations or will default on commitments. Credit risk can be associated with almost any financial transaction. BASEL-II provides two options for measurement of capital charge for credit risk
1.standardised approach (SA) - Under the SA, the banks use a risk-weighting schedule for measuring the credit risk of its assets by assigning risk weights based on the rating assigned by the external credit rating agencies.
2. Internal rating based approach (IRB) - The IRB approach, on the other hand, allows banks to use their own internal ratings of counterparties and exposures, which permit a finer differentiation of risk for various exposures and hence delivers capital requirements that are better aligned to the degree of risks. The IRB approaches are of two types:
a) Foundation IRB (FIRB): The bank estimates the Probability of Default (PD) associated with each borrower, and the supervisor supplies other inputs such as Loss Given Default (LGD) and Exposure At Default (EAD).
b) Advanced IRB (AIRB): In addition to Probability of Default (PD), the bank estimates other inputs such as EAD and LGD. The requirements for this approach are more exacting. The adoption of advanced approaches would require the banks to meet minimum requirements relating to internal ratings at the outset and on an ongoing basis such as those relating to the design of the rating system, operations, controls, corporate governance, and estimation and validation of credit risk components, viz., PD for both FIRB and AIRB and LGD and EAD for AIRB. The banks should have, at the minimum, PD data for five years and LGD and EAD data for seven years. In India, banks have been advised to compute capital requirements for credit risk adopting the SA.

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News On Credit Risk
Many benefits of moving to a bond market

29-08-2016| Source:Moneycontrol.com

Meeting corporates' credit needs would emerge as a challenge, unless the corporate bond market develops rapidly, diversifying the risk across market participants other than banks.

'Credit growth may improve in H2 on refinance, telco demand'

26-08-2016| Source:PTI

The slowdown is primarily due to a stagnation in projects, and the low-risk refinancing loans of completed infrastructure projects in sectors like power and roads will help push the credit growth.

CARE Ratings revises rating for Adani Power's bank facilities

08-08-2016| Source:PTI

Instruments with this grade are considered to have a moderate degree of safety on timely servicing of financial obligations and carry moderate credit risks.

CS maintains outperform on Arvind; GST may have one time impact

05-08-2016| Source:CNBC-TV18

Credit Suisse believes the Goods and Services Tax (GST) can be a risk going forward. "With no indirect taxation in textile segment and just 5 percent VAT on the branded apparel segment, either

Lupin falls 2% on Credit Suisse downgrade to underperform

04-08-2016| Source:Moneycontrol.com

Credit Suisse feels Lupin is trading at high end of historical valuations (23x FY18 EPS) and has low margin of safety with high concentration risk.

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