Portfolio at Risk (PAR)

Portfolio at Risk (PAR) is a financial metric used to assess the credit risk of a lender's loan portfolio. It indicates the proportion of the loan portfolio that is at risk of default or late payment. PAR is particularly important for banks and financial institutions as it helps them evaluate the quality of their loan portfolios and manage their risk exposure.

Key Aspects of Portfolio at Risk

1.?Definition:???

Portfolio at Risk measures the percentage of loans overdue by a certain number of days, typically 30, 60, or 90 days. It reflects a lender's potential losses if borrowers fail to make timely payments.?

2. Formula:??

3.?Interpretation:??

?A higher PAR indicates greater risk within the loan portfolio, suggesting that a significant portion of loans may be in default or at risk of default.???- A lower PAR signifies a healthier loan portfolio with fewer overdue loans.

4.?Importance:

• Risk Management:?Helps lenders identify and manage credit risk, enabling them to take corrective actions if needed.???
• Financial Health:?Investors and stakeholders use PAR to gauge the financial stability of a lending institution.???
• -?Regulatory Compliance:?Financial regulators may monitor PAR as part of assessing the risk exposure of banks and other lending institutions.

5.?Components:

PAR can be broken down by loan type, geographical area, or borrower characteristics to provide a more detailed risk assessment.

Conclusion

Portfolio at Risk is a crucial metric for banks and financial institutions to monitor as it provides insight into the potential risks associated with their lending activities. By assessing PAR, lenders can better manage their loan portfolios, mitigate risks, and maintain financial stability.