One of the main goals of the functioning of a commercial organization in the conditions of market relations is the extraction of material benefits from any production process, in other words, the company’s desire to maximize income. Such a desire is accompanied by a threat of obtaining losses, the offensive of which depends on the fulfillment by suppliers and buyers of their debt obligations.In order to understand the essence of credit risk and the specifics of its manifestation in the economic activities of the company, let us consider the basic concept of the term “risk”.
The term “risk” has European roots: risco (in Spanish) is a steep rock; risicare (in Italian) – to maneuver between rocks; risqoe (in translation from French) – to go around a cliff, a rock.
Much later in the English-speaking countries, the word “hazard” (danger) became widely used.
Most foreign authors determined that credit risk (hereinafter CR) is a risk associated with the activities of banks. In our opinion, this definition does not reflect the full content of this phenomenon.
Domestic scientists such as Balank defines credit risk as a risk that takes place in the financial activities of the company when providing a commodity (commercial) loan to buyers.
There are other definitions of credit risk given by Russian researchers. So Baladir Stupakov and Grigory Tokarenko define credit risk as a risk of default of the debt obligations to the creditor accepted by the borrower.
Generalizing the definitions of CR data by domestic authors, we can conclude that there are many definitions, but an analysis of the sources studied showed that in Russian practice, unlike the foreign one, there are much more interpretations of the concept of the CR that could be correlated with the functioning of companies.
The content of the interpretations studied allows us to talk about the possibility of comparing them among themselves by such criteria as:
1. Source of origin of the CR: – commercial lending; – short-term financial investments.
2. The subject of credit relations: – loans and borrowings; – Other debt financial liabilities.
3. Lender: – a bank or other credit / financial institution; – Any non-financial enterprise.
3. The result of the CR implementation: – non-fulfillment of obligations by contractors; – occurrence of losses from the lending enterprise.
In order to clarify the concept of the CR, the main characteristics of this category are necessary:
- the subject of credit relations is always any debt financial obligations taken by the supplier or the buyer;
- the result of the implementation of the CR is the supplier’s or buyer’s failure to fulfill its obligations, and as a consequence the loss of the lending enterprise;
- the sources of origin of the CR can serve as transactions such as commercial lending and / or financial investments;
- the amount of all bad debts on commercial loans can fully express the size of the company’s CR.
Based on the highlighted characteristics of the CR, it is proposed to understand the risk of occurrence of the overdue obligations of the lending company for loans and financial investments, due to the failure or improper fulfillment by the supplier or buyer of its debt obligations.
The essence of the CR of companies is similar to the nature of the CR in banks and organizations that issue loans.
Thus, in the activities of companies under the CR is understood the risk of occurrence of overdue obligations of the lending company for commercial loans and short-term financial investments, due to the failure or improper performance of suppliers and buyers of its debt obligations.
Such a definition is the most complete because it takes into account not only the CR in the form of trade debt but also the CR, which are formed when issuing loans.
The CR was always under the special attention of managers of the organization. Most companies have spent and continue to spend significant funds to minimize it. At the moment, the practice of incorporating the possible future costs of CR – related funds into special funds, for example, a reserve fund or a risk fund , has also gained a place .
All this allows to draw a conclusion about the importance of the CR in the functioning of the company.
Attempts to systematize and classify the CR began to be made already at the time of the allocation of the economy to an independent discipline.
One of the first researchers to divide the risks into different species became W. Petty.
The CR were separated into a separate group relatively recently. However, to date, there is a significant number of different concepts of the CR.
Based on the results of the analysis, the classification characteristics of the CR were determined and a proprietary classification was proposed:
- on CR -forming operations;
- by sources of occurrence;
- duration of exposure;
- on the specifics of occurrence;
- probability of occurrence;
- by the degree of impact.
The proposed classification of the CR differs from the classical classification of the CR that has become widespread.
Let’s describe the main differences of the proposed classification from existing ones:
1. The proposed classification is broadened and much more objective;
2. Repeats of the definitions included in the classification are excluded.
3. In the notion of external risks, the previously excluded risk of suppliers and buyers is excluded in the new classification.
As follows from the proposed classification, internal and external CR`s are related to the reliability of the party under the contract, but are manifested in different areas of the company.
On external CR, a company that has trade receivables or a borrowed loan can not exert influence.
In this case, among the external risks are:
- territorial (intercountry, country, regional);
- sectoral risks (for example, construction).
These two types of risks are related to the specifics of the environment in which a company that has a trade receivable or issued a loan operates.
In the event that there are cross-country risks, then the environment of the functioning of the lending company becomes extremely important, too relations between countries can be in a tense state, so the successful completion of a transaction cannot always depend only on the party to the contract. Country and regional CR s include all types of risks associated with any in-country or intra-regional processes that influence the course of events. Sectoral CR s are designed to characterize the riskiness of each industry to provide commercial loans or loans separately.
Usually external CR s are not subject to the lending company. Internal CRs can be managed by the company. Such types of CR are associated with the specifics of the operation, including the risk of non-payment by the party to the principal of the debt and interest on it, the risk of replacement (the risk of losing all or part of the value of the counterparty’s debt), the risk of failure to perform the transaction (the risk of the counterparty failing to fulfill its obligations on time or delayed execution), the security risk (the risk of losses associated with a decline in the market value of collateral, the inability to enter into the rights of possession of the pledge, etc.).The level of this type of risk is influenced by the business activity of the management of the lending company, the adequacy of its strategy and development tactics, the success of the choice of the party to the transaction,
Classifying the CR on the specifics of their occurrence should identify the characteristic and specific risks. The former are external to the lending company, and the latter, on the contrary , are internal (individual).As a rule, specific CR s are associated with individual events that are characteristic of the relationship of the parties within the framework of certain credit relations.
In terms of risk-generating operations, the CR is proposed to distinguish in two of its manifestations: the risk of commercial lending and the risk of financial investments. And in that and in that case the risk will arise as a result of commerce crediting, but according to accounting data will be reflected in different ways. This classification is based on the findings of the previous paragraph factors. Such a division of risky operations, according to the author, is necessary, because each of them may to some extent influence the activity of the lending enterprise and the level of its income. Hence follows the following classification criterion.
Knowing the amount of risk involved in each of these transactions, the company will be able to manage credit risks more efficiently, which means it will save itself from losses or bankruptcies related to credit risks.
The criterion for the duration of the exposure makes it possible to distinguish two more types of CR – permanent and temporary. Constant CRs are characteristic for the entire period of financial and economic activity of the subjects (certain types of transactions), in other words, these types of risks include those that continuously threaten the firm’s activities. For example, if an enterprise operates on an installment plan for customers, it can almost never be completely sure of maintaining the solvency of all its suppliers and customers .If the company works on the “goods-money” system, then money for the shipped products is received on its settlement account immediately after payment, therefore, for a single delay, it is said that there is a temporary risk.
The consequences will rather depend on the extent to which certain risks are predicted, which is already another criterion for classifying credit risks – “the possibility of foreseeing.”
The following classification criterion is the “degree of impact of the CR “, which, as already mentioned above, is very different. The minimal impact from the CR will lead to financial losses and, as a consequence, to a decrease in the financial stability of the creditor company.
The next level of impact is more critical. It boils down to the company’s inability to fully and timely pay for its obligations – i.e. risk of insolvency .At this stage, the company must already take any measures to minimize this risk. Otherwise, the next level of exposure to credit risk is the risk of bankruptcy.
As follows from the foregoing, the proposed classification of enterprise CR allows: – to establish specific risks affecting the enterprise’s activities, which can cause not only a decrease in the solvency and financial stability of the enterprise, but also its insolvency (bankruptcy); – identify the possibility of forecasting credit risk and the nature of manifestation over time; – to establish the level of financial losses by means of a kind of risk zones; – establish the components of credit risk and determine the sources of its occurrence.
The proposed classification has several advantages over other classifications. Firstly, it eliminates some blurring of the CR, which allows the manager to conduct a more objective assessment of possible threats and to make correct managerial decisions promptly. Also, the above classification takes into account the specific features of the CR manifestation in the economic activities of enterprises for which the management of the CR, as well as for banking organizations, plays a significant role in the management of the CR.
References
- Sheremet, AD The method of financial analysis of commercial enterprises AD Sheremet / 2 ed., Pererab. and additional. – M.: INFRA-M, 2013. – 208 p.
- Sadchikova, TA A system for managing financial resources in joint-stock companies / TA Sadchikova // Bulletin of the Samara State Economic University.Samara
- Khalakoev, AM Management of the development potential of territorial economic systems / AM Khalakoev // Proceedings of the International Scientific and Methodological Conference “Modern Problems of Economic and Social Development”. – Stavropol: AGRUS, 2013.
- Encyclopedia of financial risk management / Ed.A. A. Lobanova, A. V. Chugunov. – Moscow: Alpina Pablisher, 2013. – 786 p.
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