Question

Loan portfolio risks refer to the risks of a portfolio of loans as opposed to the...

Loan portfolio risks refer to the risks of a portfolio of loans as opposed to the risks of a single loan. Discuss the management of Loan Portfolios in Financial Institutions. In your discussion you are expected to include references to the models you have covered as well as other aspects of management.

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Answer #1

The loan portfolio is asset for lender. It is a combination of different loans with different amount and interest,lended to different people. If a big single loan is given to single person then the risk for lender to loose the loan amount is really high ,this risk can be reduced with the help of diversification by giving loan for different purpose to different people.

For eg: If one single loan is given to a famer and his crop get damage then the probablity to receive principal back is really low. If it is diversified and loan is given to different people with different occupation and geographical area then the default rate will be reduced.

Financial institutions also tries to diversify the portfolio of loans and hence to reduce deafult rate as default by one person is not corelated to other.

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