What is ‘Impaired Credit’
A deterioration in the creditworthiness of an individual or entity. This is usually reflected through a lower credit score, in the case of an individual, or a reduction in the credit rating assigned to an entity by a rating agency or lender. The borrower whose credit has been impaired will generally have lesser accessibility to credit facilities and will have to pay a higher rate of interest on loans. Impaired credit may either be a temporary situation that can be reversed, or an early sign that the borrower faces a major financial crisis down the road.
Explaining ‘Impaired Credit’
Impaired credit is usually the result of financial stress brought on by a change in circumstances for an individual or entity. In the case of an individual, impaired credit may be the end result of a job loss, long illness, a steep decline in asset prices and so on. For a corporate entity, creditworthiness may decline if its financial position deteriorates over time due to poor management, increased competition or a weak economy.
Impaired credit, whether at the personal level or at the corporate level, may need drastic changes to be made in order to alleviate financial stress and improve the balance sheet. These changes generally include reducing expenses, selling assets and using cash flow to pay down outstanding debt to bring it to a manageable level.
Further Reading
- Financial policies, investment, and the financial crisis: Impaired credit channel or diminished demand for capital? – papers.ssrn.com [PDF]
- Troubled banks, impaired foreign direct investment: the role of relative access to credit – www.aeaweb.org [PDF]
- Financial policies and the financial crisis: How important was the systemic credit contraction for industrial corporations? – www.nber.org [PDF]
- How does relationship banking influence credit financing? Evidence from the financial crisis – www.econstor.eu [PDF]
- How does trade evolve in the aftermath of financial crises? – link.springer.com [PDF]
- The transmission of financial stress from advanced to emerging economies – www.tandfonline.com [PDF]
- Impaired financing determinants of Islamic banks in Malaysia – ojs.amhinternational.com [PDF]
- Monetary policy during financial crises: Is the transmission mechanism impaired? – www.econstor.eu [PDF]
- Do credit shocks affect labor demand? Evidence for employment and wages during the financial crisis – www.sciencedirect.com [PDF]
