Definition of Credit Risk Management

Definition of Credit Risk Management thumbnail
Credit risk management demands financial dexterity.

All organizations, including nonprofits, government entities and businesses, need to establish sound and functional credit risk management procedures to prevent operating losses. Due to the nature of their operations, financial institutions generally monitor credit risks more closely than other organizations.

  1. Definition

    • Credit risk is the loss expectation arising from a business partner's default or inability to fulfill other financial commitments on time. A business partner--also called a counterparty--defaults because of bankruptcy or temporary financial distress. Credit risk management helps a firm mitigate credit losses in operating activities.

    Significance

    • Credit risk management is an integral component of an organization's profit management mechanisms. Without adequate and functional credit risk control procedures, the organization may incur significant losses if counterparties are out of business, according to financial information portal Investopedia.

    Considerations

    • Credit risk management techniques typically demand analytical acumen, financial dexterity and a level of mathematical sophistication that corporate personnel often do not possess. Accordingly, a company may hire a specialist, such as a chartered financial analyst, to help implement adequate credit risk management tools.

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References

  • Photo Credit finance image by Christopher Hall from Fotolia.com

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