The Credit Process and Credit Risk Management

Credit analysis or credit assessment is the process of assessing risk as measured by a borrower's ability to repay the loan. Within the credit analysis or assessment process, analysts also consider possible recovery in the case of default and evaluate the support collateral and other credit support tools that bear on the bank's final decision to develop a creditor relationship. Credit assessment is not an exact science, and no one factor, ratio, or other indicator alone determines if a particular loan is a suitable risk. The banking industry has developed numerous methods to help structure the credit process and improve financial results and profitability. This chapter takes a deeper look at credit risk and the credit process. It also describes the steps for the credit process—how banks generate, evaluate, and monitor loans—and the credit analysis process—how banks evaluate the credits.