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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

Sahyadri Bank grants a Rs 50 lakh term loan to a manufacturing firm. Six months later the firm's cash flows weaken and it begins missing instalments, so the bank may not recover the dues in full. Which category of risk does this primarily represent for the bank?

This is credit risk. Credit risk is the chance of loss when a borrower or counterparty fails to repay as agreed. The firm's missed instalments threaten recovery of the loan, which differs from market, liquidity or operational risk.

  1. ACredit riskCorrect
  2. BMarket risk
  3. CLiquidity risk
  4. DOperational risk

Explanation

Credit risk is the possibility of loss because a borrower or counterparty fails to meet obligations on agreed terms. Missed instalments by a borrower are the classic example. Market risk relates to price movements and operational risk to failed processes, people or systems.

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