What is residual value risk in SAP FS-BA-PM-CR - Credit Risk?

SAP Term: residual value risk

• Component: FS-BA-PM-CR

• Component Name: Credit Risk

• Description: Basel-II relevant risk that is additional to the default risk of leasing exposures. The residual value risk is calculated in the IRB approaches. Residual value risk represents the loss a bank may incur if the market value of the object leased falls below the residual value that was estimated when the leasing contract began.

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• Key Concepts: 
  Residual value risk is a type of credit risk that arises when a customer fails to pay the full amount of a loan or lease. It is the difference between the expected value of the asset at the end of its life and the amount that is actually received from the customer. This risk is particularly relevant for companies that offer financing or leasing services. 
  
  How to use it: 
  In SAP Credit Risk Management (FS-BA-PM-CR), residual value risk can be managed by setting up a credit limit for each customer. This limit should be based on the expected value of the asset at the end of its life, as well as any other factors that may affect the customer’s ability to pay. The credit limit should also be adjusted periodically to account for changes in market conditions or customer circumstances. 
  
  Tips & Tricks: 
  When setting up a credit limit for a customer, it is important to consider not only the expected value of the asset at the end of its life, but also any other factors that may affect the customer’s ability to pay. This includes their current financial situation, their past payment history, and any other relevant information. 
  
  Related Information: 
  For more information on managing residual value risk in SAP Credit Risk Management (FS-BA-PM-CR), please refer to SAP Help documentation.