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

Sundaram Finance Bank lends Rs 50 lakh to a manufacturer. Six months later the borrower's cash flows weaken and it begins delaying instalments, so the bank's loss may arise from the borrower failing to meet its contractual obligations. Which category of risk does the bank primarily face?

The bank faces credit risk. Credit risk is the chance of loss when a borrower or counterparty fails to meet contractual obligations, such as repaying instalments on time. Market, operational and liquidity risks arise from other sources such as price changes, failed processes or funding gaps.

  1. ACredit riskCorrect
  2. BMarket risk
  3. COperational risk
  4. DLiquidity risk

Explanation

Credit risk is the possibility of loss because a borrower or counterparty fails to meet its obligations as agreed. Here the borrower is delaying instalments, so the exposure is credit risk. Market risk arises from price movements, not borrower default.

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