Concentration risk arises when concerns about credit risk extend to:

Concentration risk pertains to the potential for significant loss due to a lack of diversity in an investment or lending portfolio, which often results from overexposure to a single entity or sector. When concerns about credit risk extend to individual clients' borrowings, it highlights how concentrated exposure to specific borrowers can increase the risk of default and financial instability. In this context, if one client faces economic difficulties or goes bankrupt, the lender or investor may suffer substantial losses, particularly if they have a large portion of their credit portfolio allocated to that client.

This situation underscores the importance of risk management practices, especially in scenarios where financial institutions or investors are heavily dependent on a small number of borrowers. By identifying and understanding concentration risk in relation to individual clients, financial entities can employ strategies to mitigate potential financial harm, such as diversifying their lending practices or setting limits on exposure to certain clients.

Concentration risk typically does not arise from market fluctuations, as these are more related to systemic risks affecting all investments rather than specific credit concerns. Similarly, while there could be multiple financial instruments involved in credit risk assessments, the core of concentration risk is about the overreliance on specific clients rather than merely the number of instruments. Supplier contracts can introduce other forms of risk, such