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Eligible Collaterals – Exposure Draft

Eligible Collaterals – Exposure Draft

Collateral in the lender-borrower relationship serves as a mechanism for mitigating the lender’s exposure to credit risk arising from information asymmetry that exists between the lender (creditor) and the borrower (also referred to as the obligor) by securely binding the obligor to agreed repayment schedules. Collateral also conveys a positive signal to creditors, helping to alleviate problems that may arise from adverse selection and issues of moral hazard inherent in lending.