Below diagram shows the overall Credit Analysis Process.
Below diagram shows the overall Credit Analysis Process. What does a Credit Analyst looks for?
Ever wondered why bankers ask so many questions and make you fill so many forms, when you apply for a loan. You just try to fathom, as to what they do with all this data and what they are actually trying to ascertain! It is definitely not only your deadly charm and attractive personality that makes you a good potential borrower; obviously there is more to that story.
So here we will try to get an idea about what exactly a Credit Analyst is looking for. The lender forms a very subjective opinion about the trust — worthiness of the entity to repay the loan.
Discrete enquires, background, experience level, market opinion, and various other sources can be a way to collect qualitative information and then an opinion can be formed, whereby Credit debit analysis can take a decision about the character of the entity.
Capacity Capacity refers to the ability of the borrower to service the loan from the profits generated by his investments. This is perhaps the most important of Credit debit analysis five factors.
The lender will calculate exactly how the repayment is supposed to take place, cash flow from the business, timing of repayment, probability of successful repayment of the loan, payment history and such factors, are considered to arrive at the probable capacity of the entity to repay the loan.
This is an indicator of how much the borrower is at risk if the business fails. Good capital goes on to strengthen the trust between the lender and borrower. Collateral or Guarantees Collateral are form of security that the borrower provides to the lender, to appropriate the loan in case it is not repaid from the returns as established at the time of availing the facility.
Guarantees on the other hand are documents promising the repayment of the loan from someone else generally family member or friendsif the borrower fails to repay the loan. Getting adequate collateral or guarantees as may deem fit to cover partly or wholly the loan amount bears huge significance.
This is a way to mitigate the default risk. Many times, Collateral security is also used to offset any distasteful factors that may have come to the fore-front during the assessment process.
Conditions Conditions describe the purpose of the loan as well as the terms under which the facility is sanctioned. Purposes can be Working capital, purchase of additional equipment, inventory, or for long term investment. The lender considers various factors, such as macroeconomic conditions, currency positions, and industry health before putting forth the conditions for the facility.
However, the credit analyst might be having his own reasons to justify the amount of risk he is ready to bear, which may include bad experiences with that particular sector, or his own assessment of the business requirements.
Many times there are also internal norms or regulations which force the analyst to follow a more restrictive discourse. The most important point to realize is that banks are in the business of selling money and therefore risk regulation and restrain are very fundamental to the whole process.
Therefore, the loan products available to prospective customers, the terms and conditions set for availing the facility and the steps taken by the bank to protect its assets against default, all have a direct forbearance to the proper assessment of the credit facility. The exact nature of proposals may vary depending on subsequent clients, but the elements are generally the same.
He owns multiple companies, some sports franchises, and few bungalows in all major cities. Who is the client? Sanjay Sallaya, reputed industrialist, owning majority share in XYZ ltd.
Quantum of credit they need and when? Starting a new airline division, which would cater to the high end segment of society. The specific purpose the credit will be employed for? Acquiring of new aircrafts, and capital for day to day operations like fuel costs, staff emoluments,airport parking charges, etc.
Ways and means to service the debt obligations which include application and processing fees, interest, principal and other statutory charges Ex. Revenue generated from flight operations, freight delivery and freight delivery. What protection collateral can the client provide in the event of default?
Multiple bungalows in prime locations offered as collateral, along with personal guarantee of Sanjay Sallaya, one of the most reputed businessmen in the world. What are the key areas of the business and how are they operated, and monitored? Detailed reports would be provided on all key metrics related to the business.
Answers to these questions, helps the credit analyst to understand the broad risks associated with the proposed loan. These questions provide the basic information about the client and help the analyst to get deeper into the business and understand any intrinsic risks associated with it.
Credit Analyst — Obtaining Quantitative Data of the Clients Other than the above questions the analyst also needs to obtain quantitative data specific to the client:Analysis: When you enter a bill, QuickBooks will automatically credit the Liability account called Accounts Payable. And since you purchased office supplies, an expense account .
Debits and Credits. After you have identified the two or more accounts involved in a business transaction, you must debit at least one account and credit at least one account. To debit an account means to enter an amount on the left side of the account.
To credit an account means to enter an amount on the right side of an account. T.J. Carlin has the following transactions during August of the current year. Indicate (a) the effect on the accounting equation and (b) the debit-credit analysis.
Debit Credit Rules In financial accounting debit and credit are simply the left and right side of a T-Account respectively. They are used to indicate the increase or decrease in certain accounts.
Debits and Credits. After you have identified the two or more accounts involved in a business transaction, you must debit at least one account and credit at least one account.
To debit an account means to enter an amount on the left side of the account. To credit an account means to enter an amount on the right side of an account. The totals of the debits and credits for any transaction must always equal each other, so that an accounting transaction is always said to be "in balance." If a transaction were not in balance, then it would not be possible to create financial statements.