Credit risk is the oldest bank and the risk is best known. The credit risk is the risk to earnings or capital resulting from the failure of a borrower under the terms of a contract with the bank not to comply or not to perform as agreed. Soon the credit risk of a situation, if a borrower is unable or unwilling to repay a loan to a lender. There may be two reasons for this failure: First, the borrower can not manage his / her specific business risks, and second, the borrower has been dishonest.
Given the nature of most commercial real estate markets, the financing of commercial real estate subject to an unusually high degree of credit risk. The limited supply of land in an area economically attractive, exceptionally long service life of fixed assets, long lead times for the development and construction of major projects required, and a high sensitivity, the interest was commercial real estate markets has a long history of extreme cyclical fluctuations and volatility . In connection with the commercial real estate loans, the credit risk of the bank by one or more of the following risks that threaten the borrower to be affected:
A real estate project may expose the borrower to the risk of competitive market factors, such as when a property does not get a lease in accordance with these plans. This competitive market factors have their origin in over-optimistic initial forecasts of the demand and the estimated cash flows, or they can be performed by a decline in demand during or shortly after the completion of a project. Competitive market factors may have a high turnover of distressed properties, which may decrease the value of other properties in the local market will be strengthened. Investors who buy real estate in distress can charge lower rents to convince the tenants from competing properties and rents auction down.
Sales, leasing is a further risk to the borrower, which is in most commercial real estate projects. Real estate markets to long-term leases are particularly vulnerable to falling values. In a very depressed real estate markets, leases have terminated in the middle of the contract generally, as a tenant in bankruptcy or gone out of business to move or just threatened when their leases were reviewed. In addition, owners compete with large amounts of empty space are known to gain buy-out existing leases to tenants for their properties. The value of buildings, also fully leased may decrease when reducing the leases or down, the current level of market rent be extended. Since cash flows leasing project cause decline, the borrower can not meet in a position to regular installments.
Changes in the regulatory environment and legislation are the risks for borrowers and developers. Commercial borrowers should developers / and plan for risks associated with changes in their regulatory environment and legislation. Changes in building codes are accounting and tax laws and environmental regulations examples of local and state regulations, which have a material effect on property values ??and economic feasibility of existing and planned real estate.
A developer faces construction risk a project will be completed on time or not, or if construction costs exceed the budget and result in a project that is not economically feasible.
Of course, each bank carries out research respectable credit history of borrowers and analyzes specific business plan before it adds capital. It is a way to reduce credit risk, but it is not excluded. Wherever credit is extended, it is attended with the risk of non-payment of zero to a large percentage. History has shown that even the “best deal” failed idea. A lender must take into consideration various factors relating to the borrower that affect a portfolio of loans and loans from a bank. A bank must face all these factors, while the analysis of credit projects and the monitoring of loan repayments.
The quality of information on borrowers. First, the credit risk depends on the information provided is for the assessment of certain projects and borrowers. The most incomplete, there is credit risk.
The borrower credibility. Credibility is directly to the information. A borrower’s face it, still to information. For a loan to the borrower is less risky, because the bank, the borrower finds problems before. The risk is greater if the borrower is dishonest and tries to transmit financial difficulties coverage or incorrect information.
The borrower level of cash flow and stability. A bank makes a loan to a borrower under the assumption that the loan will be repaid. This is done with the help of future cash flows generated. The borrower’s cash flow depends on how a borrower is able to manage his / her entrepreneurial risk. Thus, the loan is more secure, more stable and positive cash flows in the future.
The borrower net asset value. The Net Asset Value (NAV) is the difference between assets and liabilities of the borrower. The default risk is smaller, if1 borrower (company) has a higher net asset value and is higher with lower NAV.
A collateral. By a loan from a bank comes from the fact that it will be repaid with the revenue source or cash. But the cash flow or profit are not always stable and positive. For example, a bank may require additional guarantees that may be sold after the failure of a borrower to repay the loan. A guarantee can be an asset (house, land, stocks, etc.) or a third party guarantee.
The economic environment. The degree of credit risk depends not only on a borrower. It is a region heavily on macroeconomic factors (inflation, interest rates and exchange rates, conditions of employment), a political, legislative, etc. affected
