Credit risk is the risk that a financial loss will be incurred due to the failure of a counterparty to discharge its contractual commitment or obligation to the Company. Credit risk may arise principally in lending activities that lead to loans and advances, and investment in securities, cash and cash equivalents, accounts receivable and other investments in the Company’s asset portfolio.
Credit risk is incurred through acquisition of investments related to liquidity management. The Company manages risk in the securities portfolio through adherence to prudent investment management policies that consider the risk and reward associated with each investment and that are based on a philosophy of safety of principal, rate of return and flexibility of the instrument.
The Company employs a risk measurement process for its loan portfolio. Credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate and consistent manner. Risk is measured by reviewing exposure to individual borrowers and by reviewing qualitative and quantitative factors that impact the loan portfolios. Qualitative and quantitative analysis of a borrower’s financial information is an important factor used in determining the financial state of counterparties.
Loan exposures are managed and monitored through facility limits for individual borrowers and a credit review process. These reviews ensure that the borrower complies with internal policy and underwriting standards. The Company relies on collateral security, typically in the form of a fixed and floating charge over the assets of its borrowers. Credit risk is also managed through regular analysis of the ability of customers and potential customers to meet interest and capital repayment obligations and by changing the lending limits where appropriate. Credit risk for Company’s counterparties in other financial instruments, such as investments, is assessed through published credit ratings.