Question
When an individual is unable to repay the overdraft
availed from a bank, which type of risk is the bank primarily exposed to?Solution
• Credit Risk is the possibility that a borrower will fail to meet their obligations as per the agreed terms, leading to a potential financial loss for the lender. In the case of an overdraft, if the individual is unable to repay, the bank faces default risk, which falls squarely under credit risk. Other risks explained for clarity: • Market Risk → Losses due to changes in market variables (e.g., equity prices, FX rates). • Interest Rate Risk → Impact of fluctuating interest rates on earnings or asset values. • Liquidity Risk → Risk of not having enough liquid assets to meet obligations. • Operational Risk → Losses due to failed processes, systems, fraud, or human error.
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