The biggest risk in making a loan or credit is the risk of bad credit defaulting which has an impact on a bad loan history. Default is a condition where the debtor is unable to pay off and carry out his obligations to pay installments or the amount of the loan that has been adjusted based on the time and interest rate set. Defaulting puts you at risk of a bad credit record. If you have a bad credit record, it is very possible that you cannot make a loan at another loan institution because of your low creditability. In this article, we will discuss more credit risks.
Understanding Credit Risk
As the name implies, the risk is the adverse result of an action. Credit risk is a loss associated with the probability of default by the debtor to meet the obligation to pay installments when they fall due.
Credit risk can occur due to two things, namely the size of the loan that is too large and also the low value of the collateral. The larger the loan amount, the greater the credit exposure. The lower the credit guarantee, the lower the quality of the exposure, which causes the risk to be higher.
Types of Credit Risk
The types of credit risk are grouped into 3 as follows.
Sovereign Credit Risk
Sovereign Credit Risk or government credit risk is the risk that occurs if a country is unable to settle its obligations to pay debts when they fall due. For example, to meet the needs or interests of a country, the government in that country makes a loan to another country or a world bank, but at maturity, that country cannot repay it. This is categorized as Sovereign Credit Risk.
Corporate Credit Risk
The next one is corporate credit risk. Corporate credit risk often occurs in the banking industry or financial institutions where debtors (debt securities issuing companies) fail to make payments to creditors. In addition, defaults from companies that receive equity participation and defaults from companies that receive credit are also included in the corporate credit risk category. In anticipating this, all financial institutions are required to provide a balance sheet report, the amount of loss and profit, cash flow, and taxes.
Retail Customer Credit Risk
The last is credit risk which is individual in nature where the individual as the debtor is unable to pay the debt at a predetermined time. There are many things that make individuals or debtors experience default, such as the following.
Used for Consumptive Debt
Actually, there is nothing wrong with making a loan as long as the debtor is able to fulfill his obligations. However, most credit mistakes that result in default are using loan funds as consumer debt that has no return value from the loan source. It is different if the debt is used as business capital or additional operational costs and facilities in developing a business.
Poor Financial Flow
The following errors are financial flows that are not recorded properly so that financial flows become messy. Whether you have debt or not, you should record every income and expenditure so that all funds for needs and obligations can be prepared carefully.
Wasteful Life
The thing that causes individuals or debtors to often fail to pay is to live a wasteful life and do not heed the principle of saving. This is what makes funds or income insufficient to pay debts.
Credit Risk Management
To minimize or minimize credit risk or loss, it is necessary to mitigate credit risk as below.
Grading Model
The grading model is a rating model that aims to provide healthy credit. Credit can be said to be healthy if the amount or amount of the loan does not exceed 30% of income. With the implementation of this policy, credit risks such as default can be avoided. No wonder before applying for a loan, the debtor or borrower will be asked for information about personal data and income.
Credit Portfolio Management
The next mitigation is with credit portfolio management. This mitigation can be done on corporate or individual loans where the bank will diversify (the distribution of loans based on the type of business, company, company size, etc.) in the credit portfolio to reduce risk.
Securitization
Securitization is a technique of selling part of the credit portfolio to investors in the form of securities. This is necessary to reduce the potential for credit exposure which causes higher risk.
Collateral
As explained in the definition of credit risk, the lower the collateral value, the lower the quality of credit exposure, which causes higher risk. On the other hand, with a guarantee or collateral, the risk can be reduced.
Cash flow monitoring
The cash flows of companies or individuals can be reflected in their respective bank accounts. This needs to be monitored to limit the high level of exposure so that the risk is not too big.
Recovery management
The last credit risk management is recovery. Most banks or financial institutions have a special work unit to handle the recovery of bad loans as one of the tasks to reduce credit risk.
This is information about credit risk from BFI Finance. If you intend to apply for a loan, be sure to fulfill the obligation to pay it off to avoid the risk of adverse defaults in the future. You can also apply for a loan with a guarantee in the form of vehicle BPKB at BFI Finance. In addition to a large loan amount, applying for a loan with collateral also has a long tenor or loan repayment period, you know.
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