Introduction to Commercial Credit Analysis

Businessmen need loans for their businessess. There are many instances when the applicant (businessman), unaware of the bank’s needs, does not present all the details required or presents it in a manner that causes the Bank to reject the application. At other times, as the information given is incomplete, the applicant is harassed by demands for more information and then after he has submitted that asked for for yet some more. Time drags on while the bedeviled applicant runs hither and thither exasperated, frustrated and harrowed. The banker is also exasperated, frustrated and harrowed. He exists to make loans but before he approves the application and permits disbursal, as a responsible professional, he has to be convinced that the borrower has the capacity and the willingness to repay. Nothing thrills him more than a well presented detailed application that addresses all the concerns that he may have.

Credit Management seeks to reveal to the borrower the banker’s mind. It attempts to enlighten him on what a banker looks for, the issues that he thinks are important and to explain how he arrives at the lending decision. Credit Management is also for the banker to remind him of the issues that are important when assessing the credit worthiness of a prospective borrower.

The Business of Lending

Considering the cost of a bad loan, it is safer to refuse advancing a loan (from a banker’s perspective) than advance one in the hope of earning an income. The downside risk is enormous. This is the reason that bankers prefer to lend only to those companies who are growing, profitable, running and well regarded. This is why it appears that Banks are desperately trying to lend to those who do not need money and refuse to “give the time of day” to those who do.

One must bear in mind that the non performing asset recognition norms now imposed by the Reserve Bank of India on banks are becoming increasingly stringent. If interest is not paid for two quarters on a loan, the loan has to be deemed/ recognised as a non performing asset (NPA). Interest then cannot be accrued on this advance by the Bank and Banks are also required to state in the financials the quantum of non performing assets they have at the year end. Provisions too would need to be made – the amount depending on how good the advance I, the amount of collateral the bank has and the period it has been outstanding. This is a direct charge on profits. The enormous emphasis placed on non performing assets and the scrutiny it is subjected to (quite rightly) is one of the main reasons that bankers are reluctant to lend when there is even a shred of concern on the viability of a project or the creditworthiness of a borrower. The dictum they follow is “when in doubt, don’t”.

In conclusion it must always be remembered that the business of banking is lending. The banker takes a risk whenever he approves a loan. This is accepted. His job, as a prudent person, is that he has to ensure that the risk is minimal on any monies lent. The borrower, on the other hand, if he wishes to receive the monies he needs for his enterprise has to satisfy the banker that he is competent, the monies lent are safe and will be repaid. The participant will be enlightened on the factors, bankers look at when reviewing a credit proposal – give the borrower a peep into a banker’s mind. These are essentially:

  1. The nature of the loan sought.
  2. The period within which it would be repaid.
  3. The manner it would be repaid.
  4. The security or collateral that is given for the loan.
  5. The economic conditions and the industry conditions that might affect the creditworthiness of the borrower.
  6. The viability of the project. This would include knowing the industry and the relationship of its performance with the economic/ business cycle.
  7. The competence and integrity of management and its intention to repay the loan in the manner agreed.
  8. The past record. How successful has the particular business/ businessman been.
  9. Should the borrower address these issues, the chances are that the loan would indeed be paid in record time.