Compensating balances and monitoring of business transaction

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Credit Risk Management

Methods used by banks to mitigate credit risk include:

Compensating balances and monitoring of business transactions

- Often, loans are granted with the commitment by the borrower of maintaining a balance with the bank. This increases the likelihood that the loan will be repaid.

Screening

- The obvious tool to mitigate credit risk is the careful screening of potential borrowers. This involves information gathering. Much personal information is gathered in from individuals who wish to borrow, and there are grades of information gathering.

Monitoring

- Banks include restrictive covenats (provisions) in their loan contracts, and monitor adherence of not to these on a regular basis.

Long-term relationship building

- This practice reduces the cost of information gathering because records already exist and monitoring procedures are already in place.

Reference no: EM133266427

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