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Debt Mutual Funds Risks

Cashflow risk​

The borrower can skip paying a couple of EMIs and make irregular repayments. Irregular repayments mean that the bank will take a hit on the expected cash flow, potentially leading to a chain of undesirable events

Default risk​

The borrower may get into an insolvent situation wherein servicing the loan becomes very difficult; hence the borrower decides not to repay. This is called 'default' or the 'default risk'.

Interest rate risk​

The loan is given out at a specific interest rate. However, the economic situation may change, and the interest rates may drop in the future. This means that the bank will be forced to reduce the rates, and hence the expected cash flow takes a hit.

Credit rating risk​

The bank evaluates the borrower's credit rating at the time of giving out the loan. At this point, the borrower's credit rating could be excellent. However, for whatever reasons, the credit rating of the borrower can suddenly degrade, thereby increasing the chance of default risk.

Asset risk​

In case the borrower defaults, the bank has the right to sell the hypothecated property. What if the property itself loses its value? This is a double whammy situation for the lender or the bank. The bank loses both the principal and the asset.