• 7 C’s of Credit Analysis

    Lenders or banks use 7 C’s to perform the credit analysis of the borrower of the loan. The main parameters based on the credit analysis is done are

    • Collateral
    • Character
    • Conditions
    • Credit
    • Capacity
    • Currency
    • Country

    Collateral provides some security to the banks when they are giving high amount of loans to the borrowers. Banks use the collateral as the secondary source of repayment of the loan if the company fails to repay the loan.

    It provides some comfort to the banks as they will be able to recover either some parts or the entire amount of the loan in future by selling the collateral. Banks accept account receivables, Inventory, Land, Fixed assets, real estates as collaterals while providing loans.

    Conditions refer to the current business scenarios and the overall credit environment. Banks normally hesitate to provide loans if the current business situation is not good and profitability of the companies is not up to the mark. For companies, banks also analyze the sector they are operating in and the current condition of the entire sector. Banks check the below details while analyzing the condition of a company while providing loans.

    • Company’s risk management processes
    • Its historical financial performance and key financial parameters
    • Competition in the industry in which the company operates
    • Diversification of the business
    • Supply, patent related disputes and other possible risks
    • Regulatory or legal issues involved if any

    After checking all these parameters, banks provide the loan to the company only if they fund it suitable based on these conditions.

    Character of the company owners or the individual is one of the most important parameter, banks check while providing the loans to companies or individual. Banks refer the previous track records of the borrower and his willingness to repay the loan amount. Banks provide loans only to people with sound character whom can also be trusted to honor their commitment in repaying the loan amount.

    These are very important parameters that the banks use to take decision about the approval of the loans. The Individuals and companies should also try to improve these parameters before going for any fresh loan application.

    Credit refers to the credit score of the borrower which reflects their ability and willingness to repay the loan. Banks check the credit and repayment history to come up with the credit rating for borrowers which help the banks to take a decision about the loan.

    Capacity refers to the money generated by the company or business in order to repay the loan and interest on the same. For companies, banks use different financial ratios like “Debt Service Coverage Ratio” and “Interest Coverage Ratio” to analyze the loan repaying capability of the company. Banks normally don’t provide the loan when there is some uncertainty in the cash flow.

    Currency parameter is used for cross border lending where the banks analyze the historical trend in currency movement while taking decision about a loan. Steep unfavorable movement (domestic currency depreciation) can make a cross border loan very much costlier and increase the probability for default. Banks need to check this parameter while providing cross border loan to foreign companies.

    Country is also an important parameter used by the banks in cross border lending. Here the country’s political system, legal system, laws and regulations are closely verified before providing loan to companies operating in the country. Political stability and proper legal system are very much important parameters to boost the confidence among the cross border lenders. Banks will not be willing to provide loans to the foreign companies if the government is politically unstable, legal system is not suitable and the government policies do not support industrial growth and foreign investment.

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