What is credit analysis?
Credit analysis is a process of understanding whether a borrower (i.e. person taking a loan from a bank/ financial institution) will be able to repay the loan given to him by the lender (i.e. bank/ financial institution) on a timely basis or not.
Process of Credit Analysis:
Step 1: Collect all the information that is available about the borrower (to whom the lender is giving the loan)
Step 2: Study the information collected for various parameters (5 C’s) as listed below
Step 3: Make a decision of whether to lend the money to the borrower or not
5 C’s of Credit Analysis:
There are various parameters that need to be considered while doing credit analysis:
- Character: It consists of qualities of the borrower like honesty, commitment, hard-work and promptness of the borrower to repay the loan
- Capacity: It is the borrowers ability to repay the loan and most important factor of the analysis
- Capital: Amount of his own money put in by the owner (borrower) in the business
- Collateral: It is security (given to the lender) of the borrower in form of savings or assets that can be claimed by the lender if the borrower fails to make payments/ repayments
- Conditions: It tells us how the money is intended to be used by the borrower
Hence, these factors will help decide whether a lender should give a loan and if the loan is given, will he get his money back on time.
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Simple and insightful!!