Credit is a banking service that will lend money in trust to the business to pay on time. It can be a credit card or a loan. But this article does not focus on its basic principles. Rather, it refers to credit risk in banking transactions. This topic covers exposure to credit risk. First, credit exposure is a measure of how well a company can withstand large losses. Sometimes, this happens because the lender is in default.
An example may be, when the bank has extended the number of short and long term loans totaling $100 million in business, the credit indicator will be $100 million. In this case, credit exposure indicates the credit risk for the bank, indicating the maximum loss for the lender if the borrower defaults on the loan, Investopedia summarizes. A default is a failure to repay the loan. It covers the interest or principal on a loan or security. Companies or countries that do not pay debt because they can not be a risk of default.
Sometimes avoiding violations is unavoidable, especially when the market is volatile and prices are rising due to the invasion of Covid in Russia. But, there is a credit scoring system that helps lenders reduce their credit exposure. Obviously, the bank gives credit to their high credit customers. By doing the same, banks avoid customers with low ratings.
Banks sometimes indicate whether a customer has a problem or not. If a customer is facing unexpected financial problems, the bank finds ways to reduce credit risk by reducing losses. Loss mitigation is important to avoid potential defaults. A simple example is that when a card user misses their payment, they have to pay. Also, they must have a higher interest rate for future purchases. In the case of the card issuer, the practice may limit who can provide credit.
