Credit Analysis

Credit Analysis

“Credit analysis refers to the investigation of sucf factors that may drastically change the fortunes of business and lead to default in the repayment of a loan to commercial bank”.

 Factors considered in credit analysis
Thre are number of factors which are taken into consideration while advancing loan to a borrower. The lending officer of the bank examines the credit worthiness of the borrower. He looks into the past record of his business, his ability to repay the loan, his integrity, assets, the ability of his business to create income etc. All these factors in credit analysis or the elements in credit section are referred to as the five C’s of credit character, capacity, capital, collateral and conditions.

1. Character. credit, as we know, is a man’s faith in man. The credit character is based on the borrower’s willingness to repay the obligations. It is tested in adversity in order to judge the credit character of the prospective borrower, the loan officer shall have to see his family background, moral reputation, the values important to him, previous record of payments, etc.
2. Capacity to Pay. Another primary consideration in credit evaluation is the borrower’s ability to meet the obligation when it is due. The loan officer determines the borrower’s ability to repay the loan from these three sources – sale of assets, borrowing money from other sources and income.
3. Capital. The assets of a consumer may be in the form of house, motor car, furniture, stocks. A business concern may own assets in the form of raw material, plant, machinery building, inventory etc. The assets of a borrower stand as security for the loan. If the assets held by the borrower are liquid, i.e., they can easily be converted into cash without loss of value, than large funds can be made available to the borrowers. In case the equity used as a lever to obtain credit is not liquid, then it is very risky to advance loan.
4. Collateral. The fourth C of credit is collateral security. The collateral security may consist of stocks and marketable bonds, bills of exchange, bills of lading, warehouse receipts. The banker while making decision to grant loan carefully examines the ready marketability of the security offered. In order to be more on safe side, the banker does not ordinarily, loan up to the full current value of collateral. The amount of the loan offered against collateral varies with their types of business conditions prevailing in the country. The securities offering government guarantee may get 100% loan against their net worth, the other may get 50%, or even less than their market worth.
5. Conditions. The fifth C of credit is economic conditions. Economic conditions in and outside the country affect the ability of the borrower to repay the loan. If the economic conditions are favourable, new loans will be extended, old loans along with the interest will be repaid well in time. In case the period is of recession, then the capital may be dissipated. Income is to fall and then there is a possibility of the borrowe’s character being undermined. The bank loan officer has to be very cautious in extending credit to the borrowers both in the periods of prosperity and adversity.