Who are exposed to credit risk?
Andrew Campbell
Updated on January 20, 2026
Any business that offers credit or loans to customers is exposed to credit risk. That includes trading businesses that provide goods or services, but it also includes banks, credit card providers, mortgage providers, utilities companies and bond purchasers, among others.
What determines credit risk?
Several major variables are considered when evaluating credit risk: the financial health of the borrower; the severity of the consequences of a default (for the borrower and the lender); the size of the credit extension; historical trends in default rates; and a variety of macroeconomic considerations, such as economic …
How is credit risk exposure calculated?
The credit risk is calculated in the following manner:
- Estimate the FICO score of the consumer. The FICO score is a quantifying measure which helps in determining the creditworthiness of an individual as well as his repayment history.
- Calculate the debt-to-income ratio.
- Factor in the potential debt of the borrower.
What are the different types of credit instruments?
Perhaps, man has become more selfish too, on account of the increase in the struggle for existence; hence almost always some record of transactions is kept in black and white. This record may take the form of a promissory note, a bill of exchange, a cheque, a draft or a hundi.
When do you pay back a credit instrument?
Customers, in turn, use these credit instruments to make purchases ‘on credit’ and pay the amount ‘borrowed’ back to the bank either at the end of the month, quarter, or whatever term has been agreed upon. Any item can serve as a credit instrument, so long as both parties (the borrower and the lender) have agreed on the use of that instrument.
Who is the seller of a credit instrument called?
The seller or the creditor who draws the bill is called the ‘drawer’; the purchaser or the debtor on whom the bill is drawn is called the “drawee.” The seller may order the payment to be made to a third person called the “payee”.
Which is the most common credit instrument in India?
Hundiana is the commission sometimes deducted by the lender from the amount advanced. Specimens of the two types of hundis used in India (translated in English) are given below: A cheque is the most common instrument of credit and almost works like money.
