Credit Exposure

Credit

Quick Definition

Credit Exposure is the total amount of risk a lender faces from a borrower, representing the maximum potential loss if the borrower fails to repay.

Detailed Explanation

Credit Exposure measures how much money a lender (bank or financial institution) has at risk with a borrower. It includes loans, credit limits, and other financial commitments.

Higher exposure means higher risk, especially if the borrower defaults. Banks monitor exposure closely under regulations of the Reserve Bank of India.

Types of Credit Exposure

  • Funded Exposure: Actual loans disbursed
  • Non-Funded Exposure: Guarantees, letters of credit
  • Current Exposure: Present outstanding amount
  • Potential Exposure: Future possible risk

Why Credit Exposure Matters

  • Helps assess lending risk
  • Prevents excessive concentration risk
  • Ensures financial stability of institutions

How It is Managed

  • Credit limits
  • Diversification of borrowers
  • Collateral and guarantees
  • Regular monitoring

Example

"If a bank gives a loan of ₹5 lakh and also provides a credit card limit of ₹1 lakh, total credit exposure is ₹6 lakh."

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