The Importance Of Credit Risk Management

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Before explaining what credit risk management is, the definition of credit and credit risk will be expounded to help the readers understand thoroughly about the research topic.
Credit is defined as a transaction of money and non-monetary items between lenders and borrowers in which the borrowers are obliged to return it in the future. However, credit normally requires the payment of interest as a cost of capital or opportunity cost to compensate for the usage of the lenders’ resources (Joseph, 2013). As regards to credit risk, it is the risk when the debtors fail to meet the financial obligation in terms of reluctance, incapability, or tardiness (Bouteille & Coogan-Pushner, 2012). Hence, what does it mean credit risk management? It would be stated as managerial actions …show more content…

(Joseph, 2013) 3. Importance of CRM
Credit risk management is essential for every financial institution to ensure its safety and soundness or avoid bankruptcy, in other words. For example, the recent financial crisis in 2007 truly saw the collapse of huge amount of businesses over the world. On the contrary, firms which have good CRM policies can rescue themselves from significant impacts of the crisis. The meanings of managing credit risk are mainly related to three aspects: survival, profitability, and return on equity.
a) Survival
This first significance of CRM can be seen as the most relevant concern of financial institutions such as commercial banks like Viettinbank. However, it does not mean that non-financial institutions will not consider credit risk as one of the matters to their survival. If those kinds of firms suffer a huge amount of losses, it is possible for them to go bankrupt.

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