Literature Review On Credit Risk Management In Banks

Credit risk can simply be defined as the prospective that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms and conditions.The failure to manage credit risks properly could result in more than direct accounting loss.Similarly, the studies also find that the standard utility model works well in certain types of competitive markets but not in other institutional environments.

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Hence, CRM is understood as a process that starts from regulatory level, second, from banks’ strategic levels, then continues to the operational levels.

By referring back to Horneff’s () statement as provided above, this indicates that every level comprises of decision making process, considering risk-return trade-offs and optimising stakeholders’ targets.

decision making at different institutional levels). More importantly, a lack of a review on conceptualisations of CRA provides the fact that there is a scope of development in this field of research.

Therefore, the purpose of this paper is to illustrate, to compare, and to review analytical conceptualisations of CRA along with scope of study, analytical domains and methodologies that have been developed in the academic literature.

The remainder of this paper is organised as follows: Section In other words, decision makers who are rational will arrive at objective and logical judgements.

In fact, the costs associated with gathering complete information is high or impossible, making rational decision is implausible.It encompasses opportunity costs, transaction costs and expenses associated with non-performing asset over and above the accounting loss.It can affect banks’ portfolio, thereby attracting liquidity risk and in the worst cases, it can have negative effects on both financial industries and economies.Similarly, the full information about the consequences, in this case, borrowers engaging in risky activities cannot be obtained.Herne () finds some evidence showing that individual choices disappear when individuals have an opportunity to learn and correct their choices to be more in line with the standard utility model depending on the situation where decision making takes place, thereby concluding that different institutional structure affect such differing preferences.As this is a systematic review conducted according to the guidelines by Tranfield et al.(), the review follows a transparent and thorough process aimed at enhancing scientific rigor and at developing a reliable stock of knowledge.Moreover, rational decisions tend to be made based on unrealistic assumptions (Robbins and Coulter In CRA, it is not about solving a problem but contemplating whether to take an opportunity for return to realise in the future from investment.These opportunities come with uncertainties and it is impossible for banks to have complete information.Therefore, it has received a great interest from scholars across finance and economics to investigate such assessments by banks in different countries using diverse theoretical underpinnings and methodologies.Hence, this paper is developed to review analytical conceptualisations of credit risks assessments that have been developed in the academic literature.


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