What is credit risk vs counterparty risk?

Credit risk and counterparty risk are both financial risks, but they differ in scope and application. Credit risk refers to the possibility that a borrower will fail to repay a loan or meet their financial obligations according to agreed terms. It is commonly associated with banks, NBFCs, and lenders evaluating the likelihood of default by individuals or businesses.

Counterparty risk, on the other hand, is the risk that the other party involved in a financial transaction, contract, or business agreement will fail to fulfill its obligations. This risk extends beyond lending and applies to trade finance, derivatives, supply chain transactions, and investment agreements.

While credit risk focuses primarily on repayment capability, counterparty risk considers the overall reliability and financial stability of the other party. Effective assessment of both risks helps organizations minimize losses, improve decision-making, and maintain stronger financial and business relationships.