Credit Risk: Meaning, Impact & Risk Management

Credit risk is the chance that a borrower will fail to repay a loan or meet financial obligations, resulting in losses for the lender. It’s a crucial concept in banking, investing, and credit management. Financial institutions assess credit risk by analyzing credit scores, income levels, and past payment behavior. Poor credit risk management can lead to defaults, bad debts, and reduced profitability. To mitigate it, companies often diversify their lending portfolios, set credit limits, and monitor client behavior closely. Proper credit risk management protects businesses, boosts investor confidence, and supports a more stable financial system.