Explain the two simple models to measure credit risk concentration in the loan portfolio : migration...

Explain the two simple models to measure credit risk concentration in the loan portfolio : migration analysis and concentration limits.

Expert Solution

Migration analysis-

It is a analytical process which determines analysis for loans and losses.
When there is need of large number of loans from portfolio then migration analysis is required to evaluate the rate of interest and other processing charges.
It generates real time database for group of customers. So that it is easier for the management to take investment decisions.
Sub segment facility is available in this method. It is really an advantage for the investors to make payment of their debt obligations.

Concentration limits-

Concentration limits allows how much debt an invoice finance for an individual debtor.
Invoice factoring maximises pre payment facility for the loans.
Those customers have good spread, concentration limits will set their portfolio target and will ensure positive returns from the desired investment.
It can be expressed as proportion of portfolio loans. Proportion will ensure whether market volatility of risk is high or less.

Hence these are the major facts about measuring credit risk concentration.

Thank you! All the best for your exam!

jeff jeffy answered 2 months ago

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