Credit MGT Trainees

CREDIT ANALYSIS
January 2012
Credit and Risk
2
 Go hand in hand
 They are like twin brothers
 They can be compared to two sides of the same
coin
 All credit proposals have some inherent risk,
except lending against liquid collaterals
Lending Despite Risk
3
 Risk should not deter a Bank from lending

 A bank’s task is to identify/assess the risk
factors/parameters & manage/mitigate them on
continuous basis
 Its always prudent to have some idea about the
degree associated with any credit proposal
 The lender task, therefore, is:
 Identifying and assessing the risk factors, and
 Mitigate or manage the risk
Credit Analysis
• Credit Analysis refers to a critical
judgment/appraisal of:
1. the borrower’s business strength (first way-out),
and
2. the strength of the security (collateral)
presented by the applicant (second way-out).
• This is largely a data processing step that
requires analytical skill and highest ethical
and professional standards of conduct
4
Credit Analysis
5
 Basic Information on Customer/s:

 Credit Requested:
 Purpose of the Loan:
 Collateral
 Management/Owner of the business:
 Key Customers and Suppliers of the Business:
 Credit Exposure
Credit Analysis
6
 Borrower’s loan account performance

 Analyzing utilization of the credit facilities and/or
loan repayments, for each credit product
1. Overdraft Account
 Debit/credit turnover.
 Highest debt/credit swing.
 Lowest debit/credit swing.
 Assess the bouncing of checks and other items due to
lack of funds in the account.
Credit Analysis
7
2. Term Loans and other facilities

 Evaluated on the basis of loans already settled and
currently outstanding.
 Utilization of the facilities (i.e. fully, partially or never
utilized at all).
 Settled with regular repayments.
 Settled timely but with an element of irregularities.
 Settled but after the due date.
 Reason for the happening of irregularities.
 Is the borrower utilizing the facility to the extent of
the Bank’s satisfaction?
Credit Analysis
8
 Financial Statement Analysis

1. Ratio Analysis
 Profitability Ratios
 Gross profit margin
 Net Profit Margin
 Return on Equity
 Return on Assets
 Liquidity Ratios
 Current Ratio
 Quick Ratio
Credit Analysis
9
 Efficiency Ratio
 Stock turnover
 Average collection period
 Leverage Ratios
 Debt to Asset
 Debt to Equity
 useful instruments in deriving meaningful

information from ratios are:
1. comparison against Industry Average (vertical analysis),
2. trend in ratio over time (horizontal analysis).
Credit Analysis
10
 Appraisal of Business Plan/Feasibility Study

 Strength and Opportunity
 Threats and Weakness
 Recommendations
 Credit Analysis should screen out both the
positive and the negative aspects of each credit
request.
Credit Analysis
11
 Transaction Risk Management

 It is a process of identification, assessment, management and
mitigation of credit risks at transaction level through credit
analysis
 The Five “C” of Credit
 Character: A measure of reputation of a firm, its willingness to repay
and its repayment history.
 Capital: The equity contribution of owners and its ratio to debt.)
 Capacity: The ability to repay, which reflects the volatility of earnings)
 Condition: Economic and business condition or cycle.
 Collateral: In the event of default, banks recover loans from collateral.
Credit Risk Rating/Grading
12
 "Credit Risk" means the potential loss to the Bank

when its borrower fails to meet its obligation in
accordance with the agreed terms and conditions.
 "Credit Risk Rating/Grading" means a system
employed by the Bank to differentiate the degree
of credit risk of the borrowers.
Credit Risk Rating: Purpose
13
 Purpose
 To assist credit decision making process,
 To help in monitoring and controlling the quality of
loans and advances;
 To timely manage early warning signals;
 To maintain application of uniform credit risk
rating/grading standards; and
 To help in setting loan pricing and maintain
appropriate level of loan provisioning.
Credit Risk Rating: Parameters
14
1. Financial Risk (35%)

 Leverage: (8) Debt/Tangible Net worth
 Liquidity: (8) Current ratio (CA/CL)
 Profitability: (7)
 Operating profit Margin (Operating profit/sales)'` 100
 Debt Service Coverage (6)
 Interest coverage ratio (times) - EBIT/Interest on debt
 Quality of Financial Statement (6)
15
2. Business/Industry Risk (10%)

 Business/Industry outlook (cyclicality) and growth
(6)
 Market competition/market share (4)
3. Management Risk (15%)
 capacity and skills of top management members
and succession plan of the organization
a. Experience in related line of business (8)
b. Qualification (5)
c. Succession plan (2)
16
4. Borrower’s loan account performance

 Analyzing utilization of the credit facilities and/or loan
repayments, for each credit product
Overdraft Account
 Debit turnover.
 Highest debt swing.
 Lowest debit swing.
Term Loans and other facilities
 Utilization (i.e. fully, partially or never utilized at all).
 Settled with regular repayments.
 Settled timely but with an element of irregularities.
 Settled but after the due date.
17
5. Customer Relationship Risk (15%)

 Length of borrowing relationship (6)
 Integrity, Honesty and cooperation with the Bank(6)
 Credit Relationship with other banks (3)
Credit Risk Rating: Scores
Grade Achieve Risk Level Risk Implication
Score*
1 >= 85 Exceptionally very Bankable
low risk
2 70 - 84 Very Low risk Bankable
3 60 - 69.9 Low risk Bankable
4 50 - 59.9 Moderate risk Exceptionally Bankable
5 40 - 49.9 Potential risk Very exceptionally

Bankable
6 30 - 30.9 High Risky Non-Bankable
7 25 - 29.9 Very High risk Non-Bankable
8 < 25 Defalut Risk Non-Bankable

Credit Risk Rating: Scores
19
 Rating Based on the Achieve Score

20
“Any fool can lend money, but it takes a banker to

get it back; banking is the wisdom of lending and
getting it back.”
Diana Mac Naught

Credit MGT Trainees

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CREDIT ANALYSIS

 Risk should not deter a Bank from lending

 Basic Information on Customer/s:

 Borrower’s loan account performance

2. Term Loans and other facilities

 Financial Statement Analysis

 useful instruments in deriving meaningful

 Appraisal of Business Plan/Feasibility Study

 Transaction Risk Management

 "Credit Risk" means the potential loss to the Bank

1. Financial Risk (35%)

2. Business/Industry Risk (10%)

4. Borrower’s loan account performance

5. Customer Relationship Risk (15%)

3 60 - 69.9 Low risk Bankable

4 50 - 59.9 Moderate risk Exceptionally Bankable

5 40 - 49.9 Potential risk Very exceptionally

7 25 - 29.9 Very High risk Non-Bankable

8 < 25 Defalut Risk Non-Bankable

 Rating Based on the Achieve Score

“Any fool can lend money, but it takes a banker to

Diana Mac Naught

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