CREDIT RISK MANAGEMENT
Banks are in the business of risk management and, hence, are incentivized to develop sophisticated risk management systems. The basic components of risk management system are identifying the risks the bank is exposed to, assessing their magnitude, monitoring them, controlling/mitigating them using a variety of procedures and setting aside capital for potential losses.
RBI prescribed risk management framework in terms of: a) Asset-Liability Management practices. b) Credit Risk Management. c) Operational Risk Management. d) Stress testing by Indian Banks in the perspective of international practices.
BANKING RISKS:
It can be categorized into: i) Business-related Risks. ii) Capital-related Risks.
Business Related Risks:
The business related risks to which banks are exposed are associated with their operational activities and market environment.
They fall into six categories: namely, a) Credit Risk b) Market Risk c) Country Risk d) Business Environment Risk e) Operational Risk f) Group Risk
Note: Market Risk comprising of interest rate risk, foreign exchange risk, equity price risk; commodity price risk and liquidity risk;

Credit Risk:
Credit risk, a major risk faced by banks, is inherent to any business of lending funds to individuals, corporate, trade, industry, agriculture, transport, or banks/financial institutions.
It is defined as the possibility of loses associated with a diminution in the credit quality of the borrowers/counterparties. In a bank’s credit portfolio, losses stem from outright default due to inability or unwillingness of borrower(s)/ counterparty(ies) to meet their commitments, as also due to the risk inherent in the nature of business activity and environment.
Credit risk relating to borrower(s), may arise due to non-payment of principal/ interest amount;