Question : ___________ is the risk associated with the borrower's inability to repay the loan.
Option 1: Credit risk
Option 2: Market risk
Option 3: Operational risk
Option 4: Liquidity risk
Correct Answer: Credit risk
Solution : The correct answer is (a) Credit risk.
Credit risk refers to the risk that a borrower will be unable to fulfill their financial obligations and repay a loan or debt. It is the risk that the borrower may default on their payments or fail to meet the agreed-upon terms of the loan. This risk arises from factors such as the borrower's financial condition, creditworthiness, ability to generate income, and overall economic conditions.
Banks and financial institutions assess credit risk before granting loans or extending credit to individuals, businesses, or other entities. They evaluate the borrower's credit history, income stability, collateral, and other relevant factors to determine the likelihood of repayment. Lenders may also use credit scoring models and credit ratings to assess and manage credit risk.
