Credit risk refers to the chance of loss resulting from a borrower's failure to repay a loan or meet the terms and conditions of the loan. It could also refer to the risk that the parties that a bank transacts with are unable to keep up to its end of the bargain in financial transactions. Moreover, it is not necessary that these transactions have to be undertaken by borrowers/parties who are individuals or companies; even banks and financial institutions can transact with each other!
These transactions could range from a traditional loan to trade finance to bonds or letters of credit.
As a part of the credit risk evaluation team at my bank, I am responsible for ensuring that other financial institutions (FIs) who undertake transactions with my bank are sound enough to return our money safely or stick to the terms and conditions that they have committed to. As and when a FI approaches our bank expressing an intention to transact with us, I perform a detailed and intricate analysis of the financial statements and financial history of these FIs and prepare a paper to highlight my view on the creditworthiness of the FI. I would consider factors like; "How does that FI manage its investments? How regular is the FI in paying off its other lenders? Is the business of the FI strong enough to last in the long run and generate money for itself?"
Based on this, I set a credit limit for each FI. A credit limit is a maximum value upto which that FI is allowed to transact with our bank. The higher the creditworthiness of the FI, the higher the credit limit and vice versa. I also am responsible for the terms and conditions of our transactions with the FI to protect ourselves from any risk.
Now, let me tell you how I got here. I completed my 12th grade under the International Baccalaureate programme, where I chose physics, economics, Art, French, English, Maths as my subjects. I then went on to do a B.Sc in Economics from Poddar University in Mumbai, followed by an M.Sc in Economics from the London School of Economics. During my undergrad, I did a two-month internship in the valuations team of Ernst and Young and another internship in Experimental and Behavioural economics at Mumbai University.
Though my core subject was Economics from high school to post-graduation, this job in Finance wasn't so far away, and hence I decided to take this up. But, my advice to you, if you are an aspiring credit risk analyst is that any of the following streams can be chosen for an undergraduate - economics, management, finance, chartered accountancy or commerce. Internships will certainly boost your profile and impress any recruiter. Sometimes, even engineers are considered for this role.
All in all, I would say that an analytical mindset and willingness to learn are the two key attributes, amongst others, to be able to be a credit risk analyst.Based on conversation in March 2019