Question

Explain how financial institution manage the following to maximize it’s profit.
1. Credit risk
2. The risk arising because borrowers may default
3. Interest rate risk
4. The riskiness of earnings and returns on bank assets that result from interest rate change

Answer 1

For assessing

1) credit risk

The financial institution will study the CIBIL score or other relevant credit score to analyse the credit worthiness of the company

2)Risk arising because the borrowers may default

This risk can be dealt with taking collateral securities from the people before granting the loan

3)Interest rate risk

They should set an interest rate that will give a reasonable return for them at the same time offering competition to other institutions

4)The riskiness of earnings and returns on bank assets that result from interest rate change

This can be dealt by carefully utilising and investing bank assets and earnings through different channels of investment