Corporate Lending and the Assessment of Credit Risk

Abstract

Through this paper the author emphasizes the need for a coherent and multidisciplinary methodology in the assessment of credit risk in corporate lending. It is argued that credit risk should be assessed in the only context that is possible which is through cash flow projections generated by sound and methodologically correct financial models which also accommodate the calculation of the margins of uncertainty in the projections by allowing Monte Carlo simulation software to calculate the impact of probabilistic assumptions. Moreover, within a framework where the project risk and financing structure phases are sketched out, it is possible to both identify and evaluate the impact of various project risks and devise appropriate financing solutions in the loan agreement. The end result of such approach to corporate lending would be to reduce credit risk and to contain the effects of default on the lending institution.

Keywords: Repayment capability, project evaluation, financial forecasting

JEL Classification: D61, G17, G21, G32, G33, H43