Credit risk refers to the internal assessment made by the bank and other lending institutions prior to lending credit to the borrower. Credit risks are calculated for all types of loans including personal and business loans, and even national debt.
This involves the five Cs’, which are credit history, capital, capacity to repay, lending conditions, and collateral. These factors determine the credit risk for a loan, which are precisely calculated using complex algorithms and financial calculations.
The risk of borrowers getting defaulted is something that even banks take seriously. That is why dedicated credit risk management departments are deployed for this particular job. Even the concept of Credit risk is now applicable to some crypto lenders, who are turning to collateral tokens as a way to ensure their investments are protected.