Consumer Credit Risk

Consumer credit risk is a term that is used to denote the losses of financial institutions caused by defaults of the customers who are provided with several credit products. Banks, credit card companies and several other financial institutions that are involved in providing consumer credit option of any type are exposed to consumer credit risk.
There are several financial institutions in today�s modern world that are always ready to provide loan products to the consumers for different purposes. Most of these loans are secured and some sort of collateral should be there to avail these loans. If there is a collateral provided by the borrower, then even if the borrower defaults, the lender can sell the collateral to get back the loan amount.

In these cases, the consumer credit risk is very limited and that is true even when the value of the collateral depreciates. But it happens seldom.

On the other hand, there are thousands of financial organizations that are doing business in the market and because of this the competition is very high. This is the prime reason behind exposure of several financial institutions to consumer credit risk.
The institutions are trying to make a mark in the industry and for that the financial institutions are trying to attract as much customers as possible. For the purpose, these companies are designing several new products like unsecured loans and many more and these products in turn are causing problems for the financial institutions.

Again there are the credit card companies that are also exposed to the consumer credit risk at different times. These companies are also developing in quantity and the same thing is applicable here also that the credit card companies are taking some risks to make gains and to increase customers. But at times, these companies are also facing consumer credit risks and bearing good amount of loss.

There are several ways to hedge consumer credit risk and to minimize losses. The financial companies are taking help of the credit reports of the borrowers to decide their credit worthiness. The lenders are establishing credit management departments in their institutions to decide approval of the credit product.

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Last Updated on : 1st July 2013