Credit Risk Measurement System
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Abstract
This paper critically reviews the evolution of credit risk measurement on
individual loan and loan portfolios of banks and fi nancial institutions. The fi rst gen-
eration based on stand-alone unit of expert system is ease of use but tends to be
bias and pessimistic on the borrowers. The second development is based on key
accounting ratios derived from fi nancial statements of potential borrowers but fail
to incorporate market values. Further, the theoretical based model provides reli-
able measures of credit risk. Recent development measures credit concentration
risk at portfolio level which allows fi nancial institutions to assess their risk-taking
capacity more effectively.
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