EFFECTIVENESS OF CREDIT RISK MANAGEMENT MECHANISMS

Abstract

Credit risk arises when borrowers fail to meet their contractual obligations, potentially leading to financial losses for banks. Over the past decades, the increasing complexity of financial products and the diversification of lending practices have elevated the importance of systematic credit risk assessment and management. Banks are now required to not only evaluate the creditworthiness of individual borrowers but also monitor the collective risk embedded in their entire loan portfolio. A high-quality credit portfolio is characterized by a low proportion of non-performing loans, balanced exposure across different sectors, and a proactive approach to risk mitigation. Conversely, poor portfolio quality may jeopardize a bank’s solvency, damage its reputation, and reduce investor confidence.