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Money and credit - Ivanov V.M.

21.3. Credit Risk Management

Credit insurance - a type of insurance, the meaning of which is to reduce or eliminate credit risk. The objects of such insurance are commercial loans that are provided by the supplier to the buyer, bank loans, loan obligations, long-term investments, etc. Export credit insurance is separately allocated, which covers all the mentioned and a number of specific types of insurance, for example, insurance of currency risks against inflation, expenses exporter related to his entry into a new market.

Credit insurance protects the interests of the seller and the lender's bank in case of insolvency of the debtor or non-payment of debt for other reasons. Under a loan insurance agreement concluded at the seller’s expense, the insurance company takes over the repayment of the loan if it is not returned by the debtor.

A merchant selling goods on credit is at risk of incurring losses due to the insolvency of his debtor (economic risk) or, in the case of foreign trade transactions, due to political events (political risk). Private export credit insurance can cover economic risk. The political risk of foreign trade supplies, together with the economic one, is assumed by the government on the basis of a statement. However, in any case, the supplier must independently bear part of the loss. This should force the supplier to carefully check the creditworthiness of its customer.

In the lending process, such insurance protection methods are used, namely insurance:

• risk of loan default;

• the borrower's responsibility for non-repayment of the loan to the bank (or other lender);

• untimely payment by the borrower of interest on the loan;

• consumer credit;

• commercial credit (bills);

• deposits of individuals;

• deposits of legal entities.

Loan repayment risk insurance . In this case, the insurance object is the responsibility of all or several borrowers to the bank for timely and full repayment of the loan and payment of interest for its use within the period specified by the loan agreement.

The policyholder is a bank. The policyholder determines whether to insure the liability of all borrowers who have been granted loans, or to insure the liability of each borrower individually. The first option is attractive because under these conditions the insurer’s liability is ensured automatically (this is a significant guarantee of loan repayment) and a preferential tariff rate is set. But in an unstable economic situation, it is more advisable to insure loans with interest of each borrower separately. The policyholder has the right to insure only the amount of the principal debt or the amount of the loan issued with interest.

Subject to credit insurance and interest for it, the insurer from the time of the insured event pays insurance indemnity in the amount of 50 to 90% of the outstanding payments and interest on the debtor.

The insurance amount is set in proportion to the percentage of the insurer's liability of the entire debt amount (including the fee for using the loan), which must be repaid on the terms of the loan agreement, defined in the insurance contract.

The insurer is obliged to pay the policyholder compensation within the number of days after the occurrence of the insured event, which is specified in the rules. After the bank receives insurance compensation, it transfers the right to recover the losses incurred by the debtor within the limits of the insurance indemnity paid to it to the insurer. The transfer of the right to recovery is accompanied by the documents necessary for the exercise of this right.

If the insurer cannot exercise this right through the fault of the insurer (the claim is overdue), then the insurer is released from the obligation to pay compensation. And if the payment has already been made, the bank is obliged to return this compensation to the insurer.

Borrower liability insurance for loan repayment.

Policyholders for this type of insurance are enterprises, institutions and organizations.

The insurance object is the borrower's responsibility to the bank that provides the loan for timely and full repayment of the loan, including fees for using it. The terms and conditions of insurance are similar to the terms and conditions of insurance of the risk of default on the loan. The policyholder submits an application in duplicate, a copy of the loan agreement and a certificate of loan repayment.

The insurer determines the insurance payments that must be paid by the policyholder once. The day of payment is the debit from the account of the insured. The liability of the insurer arises when the debtor does not return the amount to the creditor bank within three days after the due date of payment due to the insurance contract.

The liability of the insurer also ranges from 50-90%. The insurance amount is set in proportion to the share of the insurer's liability specified in the contract of the amount owed.

Credit risk insurance in countries with developed market economies provides for so-called concurrent insurance as a prerequisite. It lies in the fact that the borrower of the loan or the buyer of the goods on credit for the term of the loan insures life, ability to work, surviving to the end of the contract. This type of insurance is also applied when pledging property. This means that the borrower is insured for the duration of the loan.

When concluding insurance contracts for both types of liability insurance, the borrower's solvency is taken into account.

By creditworthiness, it is understood that the business entity has the grounds necessary to obtain a loan and the ability to repay the loan on time. The conclusion about the creditworthiness of the borrower is made on the basis of an analysis of the thoroughness of its calculations for previously obtained loans, the current financial situation, and the ability to mobilize funds from various sources, if necessary, i.e. the level of liquidity.

The bank, making a decision on granting a loan, determines the level of risk that it is ready to take on and the amount of loan that it can provide.