Credit risk : The possibility of loss arising on account default by the borrower or counterparties due to inability or willingness
or deterioration in the quality of credit portfolio.
Default risk The risk on account of potential failure of the borrower to make promised payments, partly or wholly. Credit
spread risk or downgrade risk : The risk arising on account of actual or perceived deterioration in credit quality and may arise
from a rating change. There may not be actual default on the part of the borrowers.
Systematic or intrinsic risk : It is the risk which corresponds to the risk to that segment of the economy, to which that loan is
extended. If a portfolio is diversified across regions, industries, markets and borrowers, the portfolio risk is minimized but the
risk is still prevalent due to risk to those regions, industries or market.
Concentration risk : The risk to the portfolio on account of concentration of loans in specific regions, industries, markets or
borrowers, instead of diversification of the portfolio.
Counterparty risk : The risk arising on account of non-performance of trading partners of the borrower, leading to default by
the borrower. It is a transient financial risk associated with trading.
Country risk : The risk arising due to default by the borrower or counterparty on account of restrictions imposed by the govt.
of other countries due to economic conditions prevailing in the countries of counterparties.
Credit rating : An assessment of the borrower to determine whether after expiry of a given period, the borrower will have the
capability to honour the financial commitments.
Credit rating model : The tool or a methodology, used by a credit rating agency to carry credit rating.
Rating migration : The change in the rating of a borrower over a period of time when rated on the same standard or model,
which may lead to down grade risk.
Altman's Z Score : A credit rating model that forecasts the probability of a firm becoming bankrupt within 12 months' period.
It combines five financial ratios.
JPMorgan's Credit Metrics: A credit rating model developed by .113 Morgan which focuses on estimating the volatility in the
value of assets caused by variations in the quality of assets.
Credit Risk+: A credit rating model by Credit Swiss which is based on actuarial calculation of expected default rates and
unexpected losses from the default.
Credit appraisal : The process of evaluation of creditworthiness of the borrower and the activity/project with a view to take
decision on the credit request from a prospective borrower.
Prudential limits : The ceilings fixed by the bank on different type of exposure say, loan concentration, credit exposure,
maturity profile of the loan book etc.
Risk pricing : The fixation of interest rates and other levies by the bank corresponding to the quantified risk.
Loan review mechanism: A tool for constant evaluation of the quality of the loan portfolio with a view to bringing qualitative
improvements in credit administration.
Credit risk mitigation : The process through which the credit risk is reduced or transferred to a counter party. It may involve
proper documentation, securing through collaterals etc.
Securitisation: A process where the financial securities are issued against the cash inflows (in the form of repayment of
principal and interest) generated from a pool of loan assets.
Special purpose vehicle : An agency that carries the process of securitization.
Credit derivatives : The tradable financial instruments created on the basis of underlying credit assets (like loans, bonds,
accounts receivables etc.) by unbundling them into a commodity. CDs transfer the risk in the credit assets without
transferring the underlying assets_
Protection buyers The originators of the credit derivatives which transfer the credit risk to the protection sellers without
transferring the credit asset.
Protection sellers: The party which undertakes to provide the protection to the protection buyer, for a price, from credit risk
with reference to a notional value.
Credit event: In the context of credit derivatives, it is a happening like delinquency, default, foreclosures, prepayment etc. as
agreed in the contract, taking place with reference to the obligation, when protection seller shall be required to make the
payment.
Credit default swaps (CDS) A simple and popular form of Credit Derivative under which the protection buyer agrees to pay
regular premium to the protection seller for buying protection against the reference obligation. These are generally offbalance
sheet items.
Credit linked notes (CLN) : These are on-balance sheet equivalents of a credit default swap, that combine credit derivatives to
normal bond instruments. lt converts a credit derivative to a marketable instrument.
Total return swap (TRS): Under this arrangement the protection buyers swaps with the Protection seller , the actual return on
an asset, in return for a premium.
or deterioration in the quality of credit portfolio.
Default risk The risk on account of potential failure of the borrower to make promised payments, partly or wholly. Credit
spread risk or downgrade risk : The risk arising on account of actual or perceived deterioration in credit quality and may arise
from a rating change. There may not be actual default on the part of the borrowers.
Systematic or intrinsic risk : It is the risk which corresponds to the risk to that segment of the economy, to which that loan is
extended. If a portfolio is diversified across regions, industries, markets and borrowers, the portfolio risk is minimized but the
risk is still prevalent due to risk to those regions, industries or market.
Concentration risk : The risk to the portfolio on account of concentration of loans in specific regions, industries, markets or
borrowers, instead of diversification of the portfolio.
Counterparty risk : The risk arising on account of non-performance of trading partners of the borrower, leading to default by
the borrower. It is a transient financial risk associated with trading.
Country risk : The risk arising due to default by the borrower or counterparty on account of restrictions imposed by the govt.
of other countries due to economic conditions prevailing in the countries of counterparties.
Credit rating : An assessment of the borrower to determine whether after expiry of a given period, the borrower will have the
capability to honour the financial commitments.
Credit rating model : The tool or a methodology, used by a credit rating agency to carry credit rating.
Rating migration : The change in the rating of a borrower over a period of time when rated on the same standard or model,
which may lead to down grade risk.
Altman's Z Score : A credit rating model that forecasts the probability of a firm becoming bankrupt within 12 months' period.
It combines five financial ratios.
JPMorgan's Credit Metrics: A credit rating model developed by .113 Morgan which focuses on estimating the volatility in the
value of assets caused by variations in the quality of assets.
Credit Risk+: A credit rating model by Credit Swiss which is based on actuarial calculation of expected default rates and
unexpected losses from the default.
Credit appraisal : The process of evaluation of creditworthiness of the borrower and the activity/project with a view to take
decision on the credit request from a prospective borrower.
Prudential limits : The ceilings fixed by the bank on different type of exposure say, loan concentration, credit exposure,
maturity profile of the loan book etc.
Risk pricing : The fixation of interest rates and other levies by the bank corresponding to the quantified risk.
Loan review mechanism: A tool for constant evaluation of the quality of the loan portfolio with a view to bringing qualitative
improvements in credit administration.
Credit risk mitigation : The process through which the credit risk is reduced or transferred to a counter party. It may involve
proper documentation, securing through collaterals etc.
Securitisation: A process where the financial securities are issued against the cash inflows (in the form of repayment of
principal and interest) generated from a pool of loan assets.
Special purpose vehicle : An agency that carries the process of securitization.
Credit derivatives : The tradable financial instruments created on the basis of underlying credit assets (like loans, bonds,
accounts receivables etc.) by unbundling them into a commodity. CDs transfer the risk in the credit assets without
transferring the underlying assets_
Protection buyers The originators of the credit derivatives which transfer the credit risk to the protection sellers without
transferring the credit asset.
Protection sellers: The party which undertakes to provide the protection to the protection buyer, for a price, from credit risk
with reference to a notional value.
Credit event: In the context of credit derivatives, it is a happening like delinquency, default, foreclosures, prepayment etc. as
agreed in the contract, taking place with reference to the obligation, when protection seller shall be required to make the
payment.
Credit default swaps (CDS) A simple and popular form of Credit Derivative under which the protection buyer agrees to pay
regular premium to the protection seller for buying protection against the reference obligation. These are generally offbalance
sheet items.
Credit linked notes (CLN) : These are on-balance sheet equivalents of a credit default swap, that combine credit derivatives to
normal bond instruments. lt converts a credit derivative to a marketable instrument.
Total return swap (TRS): Under this arrangement the protection buyers swaps with the Protection seller , the actual return on
an asset, in return for a premium.
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