PD full form in banking is probability of default, sometimes called default probability. It is an occasion when a borrower cannot meet his repayment obligations on a loan, which is assessed over a specific period, for example, one year. If a borrower is judged to have a high probability of default, the lender will either charge a higher interest rate or decline the loan requirement.
Default probability is used by lenders, as it works as a crucial risk measurement tool. It is determined based on the capacity of the borrower to repay the loan. However, the paying capacity can be influenced using a wide range of elements.
What Else Should You Know About PD?
Lenders will look at the financial health of the borrower before passing on the loan. In the case of consumers, the first thing to be considered is the debt-to-income ratio and credit score. In addition, they will determine that past payments have been submitted on time if the loan is taken out. In case, the borrower has a poor credit score or owes a lot to other loans, it shows that they might have a tough time repaying their loan. For enterprises or large businesses, lenders usually look at the company’s cash reserves, cash flow, or any other on-hand asset.