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How to Mitigating credit risk?
>Assessing Debt Service Coverage of theBorrower for lending or advancing,
>Credit worthiness, Business connections and reputation in case of Credit Dealings in business.
Credit insurance, deposit insurance, risk based pricing, covenants, etc are some of the methods of mitigating the credit risk
Try to hold a tangible asset as a collateral70% more than the amount financed (because the market value can be decreased any time due to riots, political situation, economic crisis etc) so the cousion of70% must be covered in it. secondly try to hold first charge on the collateral. Must ensure the business worth of the borrower is strong to pay debts. Scrutinize the honesty of borrower from the local market. Current ratio is also a suitable key to check the business worth.
To mitigate credit risk, bankers usually ask for security and/or guarantee(s). Security can be primary or collateral or both. Guarantee is of a person(s)(or entities) with substantial net worth.
Very simple first of all check the repayment capacity of the client if u are working in credit department in any bank.Check the Debt structure and and industry returns and value your client standing among the industry.
Otherwise if u have portfolio investment in equity market than hedging mitigates the risk and there are lot of strategies of benjuman gram and warren buffet.
There is ruke in accrual system of accounting that record the losses when they are eminent and record the profits when they are earned. Therefore the simple rule of mitigating risk is to record the losses when they are expected by creating provisioning.
