Credit Analysis and Credit Management
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This introductory chapter outlines the processes of originating credit and managing credit. Credit origination involves loan underwriting, assessing the creditworthiness of a borrower, determining a borrower risk rating (BRR), and structuring the loan. Credit administration involves monitoring credit quality, covenants, and loan documentation, and taking actions to avoid loan loss. The chapter introduces the two-dimensional risk-rating system that separates the BRR from the facility risk rating, though they jointly determine the expected loss on a loan. The chapter reviews the traditional “Five Cs” method of credit analysis and its derivative, the criteria-based methodology to assign a BRR. Because a credit rating is essential to lending, loan pricing, and capitalisation, the chapter highlights the adverse effects on risk rating due to information asymmetry.