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Credit Risk Modeling

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  • Ram Pratap Sinha

Abstract

Credit risk is most simply defined as the potential that a borrower/counter party will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maintain credit risk exposure within targeted limits so that the bank/financial institution can maximize risk adjusted return. Credit risk models facilitate the process of credit risk management in a big way. The implementation of the new Basel Accord requires computation of capital charge on the basis of internal credit risk models. The present paper discusses the alternative approaches to credit risk modeling and the implication of the new accord on model building with special reference to the following: (i) Treatment of systematic risk, and (ii) Treatment of granularity charge. Further, the paper provides a brief report of the recent initiatives in India regarding credit risk management.

Suggested Citation

  • Ram Pratap Sinha, 2005. "Credit Risk Modeling," The IUP Journal of Managerial Economics, IUP Publications, vol. 0(3), pages 54-65, August.
  • Handle: RePEc:icf:icfjme:v:03:y:2005:i:3:p:54-65
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