CREDIT ANALYSIS:
Credit Analysis involves investigation of the capacity of the applicant to borrow and his willingness to repay the debt in time according to the agreement. Generally the following yardsticks are used to analyse the creditworthiness of the applicant. They are Five ‘C’s of credit.

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1.      Character [Good Citizen]: Credit character is a relative term which tells the reputation of the applicant in meeting the obligations upon maturity. High income, good business and profits need not necessarily always be taken for granted as creditworthy applicant.
2.      Capacity [Cash Flow]: The ability to repay depends upon the earning capacity therefore this point measures the ability of the borrower to utilise the loan effectively and profitably.
3.      Capital [Wealth]: The financial position of the borrowers firm is to be analysed with special reference to the tangible net worth and profitability.
4.      Collateral [Security]: The type of assets the borrower pledges against the loan as security is assessed.
5.      Conditions [Economic Conditions, Especially Downside Vulnerability]: The general position of the business, economic conditions in the country and the competitive factors which will affect the potential borrowers ability to earn income and repay the debt.

The lender’s problem is to attempt to quantify these 5 C’s, so that meaningful and consistent decision can be made regarding borrowers creditworthiness. This procedure is known as “Credit Analysis”. Its purpose is to determine a borrower’s credit risk. Credit analysis is done because-
“Any fool can lend money, but it takes a lot of skill to get it back.”

Credit Reports:
Detailed credit report on each customer (borrower) should be compiled and recorded in the bank/lending institution.
These reports can be prepared on the basis of –
1.      Discussions with competitors, neighbors of customers and marketing representatives.
2.      Reports obtained from branches/Banks with which the customer has dealings.
3.      Valuation of assets of customer, with the help of technical experts.
4.      For the basis of the past dealings with the bank, credit reports should be revised periodically. If an advance is guaranteed by third party, guarantor’s credit reports also should be revised.

Credit Rating:
The banks evaluate the borrower depending on the risk involved in the financing to them. Therefore, each borrower is graded or credit rating is assigned to them and interest is charged on the principle of “lower the risk, lower the interest”, “Higher the risk, higher the rate of interest”. This means the borrowers having higher credit rating would be charged less and at the same time borrower with lower credit would be standing, information system, financial discipline and conduct of the accounts of the borrower by giving marks for each category or items which is aggregated and credit rating is assigned. The aggregate marks and the credit ratings are as under.
 
Credit Risk Rating:

Credit Risk Code

Scoring Band

AAA+

AAA

AA

A

B

C

D

:

:

:

:

:

:

:

Prime

Excellence

Good

Satisfactory

Risk Prone

High Risk

Highest Risk

90% and above

80% and above less than 90%

60% and above but less than 80%

40% and above but less than 60%

Below 40% or Sub Standard Assets

Doubtful Assets

Low Assets

AAA

AA

A

B

50 marks (score) and above

40 to 49 marks

30 to 39 marks

Below 30 marks

  1. Sometimes, the banks charge interest to prime borrower’s account at the rate of prime lending rate (PLR).

 
Rate Of Interest:
Finance to industry/trade including SSI advances.
i.        Limits upto Rs. 2 lakhs
On working capital and shart term loans              – 12.00% p.a. (PLR)
Term Loans (3 years and above)                           – 12.50% p.a. (PTLR)
ii.      Limits above Rs. 2 lakhs
To be linked to Credit Rating of the borrower. Interest rates applicable to industry, trade and Non-Banking Finance Companies for limits above Rs. 2 lakhs for:
a.      Working capital including Working Capital Demand Loan (WDCL) facilities and Short Term Loans and
b.      Term Loans of 3 years and above are given below.

Credit Rating and Rate of Interest

Category of Borrower

Rate of Interest (p.a. %)

Working Capital including WCDL and Short Term Loans

Term loans of 3 years and above

Existing w.e.f. 1/9/2000

Revised w.e.f.

5/3/2001

Revised w.e.f.

1/10/2000

Revised w.e.f.

5/3/2001

Prime

AAA

AA

A and below

12.50

13.75

15.10

16.50

12.00

13.25

14.60

16.00

12.50

13.75

15.10

16.50

No change

No change

No change

No change

 

 

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