Credit Risk is the potential for a loss arising from a borrower or counterparty failing to meet their financial obligations as agreed. It is a critical concept in banking, investment, and corporate finance, as it directly impacts lenders, investors, and financial institutions. Understanding credit risk is essential for managing portfolios, setting lending policies, and ensuring financial stability.

Credit risk can arise from various sources, including default on loans, bonds, derivatives, or trade receivables. It is influenced by factors such as the borrowerís creditworthiness, economic conditions, industry performance, and market volatility. High credit risk typically demands higher interest rates or risk premiums to compensate lenders or investors for potential losses.

Financial institutions and investors use several tools to assess and manage credit risk. These include credit ratings provided by agencies such as CRISIL, ICRA, CARE, and India Ratings, financial statement analysis, risk modeling, and collateral requirements. By evaluating the probability of default and potential exposure, institutions can mitigate losses and make informed lending or investment decisions.

In India, credit risk management is governed by SEBI, RBI, and other regulatory bodies, ensuring that banks and financial institutions follow prudent lending and risk assessment practices. Proper credit risk management not only protects individual institutions but also strengthens overall market confidence and stability.

In summary, credit risk is the likelihood of financial loss due to a borrowerís failure to meet obligations. By understanding its sources, measurement methods, and regulatory guidelines, investors, banks, and financial professionals can effectively manage risk, protect capital, and make informed decisions within Indiaís SEBI- and RBI-compliant frameworks.