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Credit risk is the possibility that a borrower or counterparty will fail to meet its contractual obligations in accordance with agreed terms, resulting in financial loss to the bank. Since lending is the primary business activity of commercial banks, credit risk forms the largest component of overall banking risk. Credit risk cannot be completely eliminated because lending inherently involves uncertainty arising from economic conditions, borrower behavior, industry dynamics, and unforeseen events. However, banks can effectively manage and minimize credit risk through a combination of sound policies, advanced analytical tools, prudent lending practices, continuous monitoring, and regulatory compliance. Effective credit risk management not only safeguards the bank's profitability and capital but also contributes to financial system stability. The foundation of credit risk management is a well-defined credit policy. A bank's credit policy specifies lending objectives, risk appetite, target sectors, borrower eligibility, exposure limits, collateral requirements, approval authority, and monitoring procedures. A comprehensive policy ensures consistency in lending decisions and prevents excessive exposure to risky borrowers. However, even the best policies require periodic review to remain relevant in changing economic and regulatory environments. Credit appraisal is one of the most important tools for managing credit risk. Before granting loans, banks conduct detailed assessments of the borrower's repayment capacity, financial strength, business model, industry position, management quality, and future cash flows. The traditional approach involves analyzing the Five Cs of Credit—Character, Capacity, Capital, Collateral, and Conditions. Character evaluates the borrower's integrity and repayment history. Capacity examines the ability to generate sufficient income for loan repayment. Capital reflects the borrower's financial commitment. Collateral provides security against default, while Conditions refer to economic and industry factors affecting repayment. A __________ _______ ______ _________ ___.
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