Credit Risk

21 pages carry this tag.

Concept Guides

Concept Guide

Credit Risk Fundamentals

Credit risk is the risk that a borrower will fail to make promised payments on time.

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Concept Guide

Reading CRISIL, ICRA, Moody's Reports

Credit rating agencies distil complex credit risk analysis into a simple alphabetical grade.

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Concept Guide

Altman Z-Score and Distress Models

In 1968, Edward Altman of New York University combined five financial ratios into a single score that predicted corporate bankruptcy with reasonable accuracy.

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Concept Guide

Bond Pricing and Yields

A bond is a loan in tradeable form. The borrower (issuer) promises to pay fixed interest (coupon) periodically and return the principal (face value) at maturity.

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Concept Guide

Covenants and Triggers

When a lender extends a large loan, they don't just hand over the money and hope for the best.

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Concept Guide

Credit Scoring (Traditional and Alt-Data)

A credit score is a number that summarises an individual's credit history and predicts the probability of default on a future loan.

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Glossary

Yield to Maturity

The single discount rate at which a bond's future coupons and principal repayment equal its current market price. It is the total annualised return from holding the bond to maturity.

Glossary

Credit Spread

The extra yield a corporate bond pays over a government bond of the same maturity, compensating for default risk and lower liquidity.

Glossary

Credit Rating

An agency's opinion of a borrower's ability to repay, expressed on a letter scale from AAA (highest safety) down to D (default). In India the major agencies are CRISIL, ICRA, and CARE.

Glossary

DSCR

Cash available for debt service divided by scheduled principal and interest payments. It measures whether operations generate enough cash to meet debt obligations as they fall due.

Glossary

Coupon Rate

The fixed annual interest a bond pays as a percentage of its face value. It is set at issue and does not change with the market price.

Glossary

Duration

A measure of a bond's price sensitivity to interest-rate changes, expressed in years. Longer duration means bigger price swings when yields move.

Glossary

NPA

A loan on which interest or principal has remained overdue for more than 90 days. Banks must classify such loans separately and provide against expected losses.

Glossary

Covenant

A condition attached to a loan or bond that the borrower must maintain, such as a maximum leverage ratio or minimum coverage ratio. Breaching one can trigger penalties or immediate repayment.

Glossary

Promoter Pledge

Promoters borrowing against their own shareholding by pledging shares as collateral. Disclosed quarterly in Indian shareholding patterns.

Glossary

Working Capital Cycle

The number of days cash stays locked in operations: inventory days plus receivable days minus payable days.

Glossary

The share of a bank's total deposits held in current and savings accounts. Current accounts pay no interest and savings accounts pay roughly 3 to 4 percent, so a high CASA ratio means the bank funds its loans with cheap money.

Glossary

Cost of Funds

The blended average interest a bank pays across all its deposits and borrowings: current accounts at 0 percent, savings at about 3 percent, fixed deposits at about 6.5 percent, and other funding.

Glossary

Net Interest Margin

Interest a bank earns on its loans and investments minus the interest it pays on deposits and borrowings, expressed as a percentage of its interest-earning assets. It accounts for funds the bank could not lend out.

Glossary

Capital Adequacy Ratio

A bank's capital measured against its risk-weighted assets. It shows how much cushion the bank has to absorb loan losses and how much further lending it can support.

Glossary

Provisions

Money a bank sets aside from its income against loans it doubts will be repaid. Provisions are charged to the profit and loss statement before profit is struck.