Checking the Creditworthiness of the Borrower:
The bank, in many ways, checks the creditworthiness of the borrower and accordingly the borrower is given some marks that decide the grade given to the borrower. The checking is done by judging the financial statement given by the borrower and by gathering information from market sources.
1. Judging Financial Data: Many ratios are derived from the data submitted and seen to it that it fulfills the minimum requirements.
a. Current ratio > 1.33
b. Debt equity ratio < 1
c. Debt service coverage ratio > 1.75 etc. and audit queries are also solved.
2. Collecting Market Information: The most reliable information is gathered from other bankers with whom the borrower had dealt in the past. Information related to, the regularity of repayment done, the relations of the bank with the borrower, etc. is collected from the other banks. This information is very confidential and the borrower does not know about it. When the borrower is new in the business, the information is gathered from his relatives, the persons who have given him orders, his suppliers, etc. The information is also gathered from his competitors, the employees, etc. by actually visiting them.
This credit appraisal department consists of expertise from various fields that help the bank to decide whether the project is viable or not, the cost quoted by the borrower is correct or not, whether the asset for which the term loan is given is really in working condition or not etc. The expertise check whether the invoice presented is genuine or not, the credit worthiness of the buyer who has given order to the borrower, etc.
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