How To Assess Creditworthiness

Table of contents:

How To Assess Creditworthiness
How To Assess Creditworthiness
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Commercial banks, when granting a loan to a borrower, without fail assess his creditworthiness, i.e. ability to timely pay off debt obligations assumed. The bank's profit in the future depends on how creditworthy the client is, as well as the return of the principal debt on the loan.

How to assess creditworthiness
How to assess creditworthiness

Instructions

Step 1

When assessing the creditworthiness, the financial capabilities of the borrower in the future are determined, i.e. its position in perspective. For this, an analysis of the activities of the enterprise is carried out, and the feasibility and feasibility of the project for which it plans to spend borrowed funds is assessed.

Step 2

Before starting the credit analysis, the necessary information is collected. To do this, a potential borrower provides the bank with legal documents depending on the form of ownership, as well as accounting and financial statements, which will play a major role in making a decision on lending to a client.

Step 3

In addition, banks often request a feasibility study for a project for short-term loans (up to one year) or a business plan if a client has a need for a long-term loan. These documents make it possible to assess the cash flow of the enterprise and find out the availability of funds to repay the future loan.

Step 4

When analyzing a client's financial statements, a number of ratios are calculated. This includes indicators of turnover, profitability and profitability, solvency, financial stability and liquidity. After analyzing these coefficients, a conclusion is made about the state of the potential borrower, as well as the dynamics of his work. As a rule, when calculating indicators, each of them is assigned a certain number of points, which are subsequently summed up. The total value will determine the risk group of this client for the bank.

Step 5

In addition, when analyzing the creditworthiness, the presence of the client's credit history with other institutions must be taken into account. To do this, banks usually require the client to decrypt all open accounts and a certificate of the presence of debt in other banks. The presence of a positive credit history is assessed as a favorable factor for issuing a loan.

Step 6

In addition to financial indicators, when determining the creditworthiness, the place of the enterprise in the market is determined, its share in the market segment, the interaction of the client with other business entities is taken into account, the presence of subsidies for the company's activities, for example, when lending to agricultural enterprises.

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