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Credit Analysis | Process | 5 C's of Credit Analysis | Ratios



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hello friends welcome to the channel of Wallstreetmojo will we are going to

discuss a too-tall on credit analysis topic credit analysis in limit terms

great analysis is more about identification of what of risk in

situation where a potential for landing is observed by the banks both

quantitative and qualitative assessment forms a very part of the overall

appraisal of the clients in terms of companies and individuals so this in

general helps to determine the entity's debt servicing capacity or its ability

to repay in this particular Too - tall we are going to look at create analysis

from them from beginners point of view now what is created on as a secret

analysis is basically a process of drawing conclusions from available data

it can be both qualitative and quantitative regarding the credit

worthiness of the entity and making recommendations regarding the perceived

needs and risk so credit analysis is also concerned with the identification

and evaluation and mitigation of the risk associated with an entity's failing

to meet financial commitments let's understand the credit analysis process

now below is the diagram that shows the overall credit analysis process it

starts from proposal then inspection is done and and then then financial secured

scrutiny and market review post that scenario there is a presentation of the

proposal that is done and it has been pitched the sanction of the assessment

after after screening or various things which are important enough the data

coalition is done any analysis of various parameters or any any nitty

gritties that needs to be followed a credit rating is done presentation for

these sanctions and if there are any cancellations and things that needs to

be added and all is been done some terms and conditions which needs to be pitched

in because if that will be formed that will form a part of it so that any

conflict of interest can be avoided and then for a final thing is the approval

of the process so what does a credit analyst look for see ever wondered why

bankers ask so many questions and make you will

so many forms when you apply for a loan don't some of them feel intrusive and

repetitive and whole process of submission of various document seems

cumbersome you just try to fat them as to what they do with all this data huh

and what they are actually trying to assert him it is definitely not only

your your your deadly chaja will attract a personality that makes you good

potential borrower obviously there is more to that particular story so here

will try to gain get an idea about what exactly a credit analyst is looking for

so it is bifurcated into the Phi C's the first C is going to be the character now

this character this is a part where the general impression the impression of the

protective borrower is analyzed the lender forms a very subjective opinion

about the trust worthiness of the entity to repay its loan discreet inquiry is a

background and experience level market opinion at various other sources can be

availed to collect qualitative information and then an opinion can be

found whereby he can take a decisions about the character of the entity the

second C is called the capacity the capacity over here refers to the ability

of the borrower to service the loan from the profit generated by the investments

now this is perhaps the most important of the 5 factors the LAN the lenders

will will calculate exactly how the repayment is supposed to take place and

cash flows from the business from the timing of payment of a repayment and

probability of the successful or repayment of the loan and payment of

history and such of the factors are considered to arrive at probable

capacity of the entities to repay the loan so the first C was character the

second was capacity the third is capital the capital is the borrower's own skin

of the business this is seen as the proof of the borrower's commitment to

the business this is an indicator how much the borrower's

is at risk if the business fails and lenders expect a decent contribution

from the borrower own asset and personal financial guarantee to establish that

they have committed their own funds before asking for the funding so good

capital goes on to strengthen trust between the lender and the borrower the

next is the collateral or the guarantees the collateral are the form of security

that the borrower provides to the lender to of to

appropriately loan in case it is not repaid from the returned as established

at the time of availing the facility guarantees on the other hand are the

documents promising the repayment of the loan from someone else generally from

family members or friends if the borrower fails to repay the loan getting

adequate collateral or guarantee it has made deemed fit to cover partly or

wholly the loan amount bears huge significance so this is a way to

mitigate the default risk many times collateral security is also used to

offset any distasteful factors that may have come to forefront during the

assessment process conditions that describes the purpose of the loan I mean

that's the last thing the conditions that lassie condition describes the

purpose of the loan as well as the terms under which the facilities sanction

purposes can be working capital purchases of additional equipment

inventory or for long term investment so the lender considers various factors

such as macroeconomic conditions currency positions and industry health

before putting forth the condition for the facilities let's analyze the credit

analysis case study from the time immemorial immemorial there has been an

internal conflict between the entrepreneur business and an N and

bankers regarding the quantification of the credit the resentment on the part of

the business owner arises when he believes that the bankers might not be

fully appreciating his business requirement needs and might be

underestimated the real scale of the opportunity that is assessable to him

provided he gets sufficient quantum of loan however the credit analysis might

be having his own reasons to justify the amount of risk his ready to bear which

may include bad experiences with that particular sector or his own assessment

of the business requirements many a times there are also internal norms or

regulations which forced the analyst to follow a more restrictive de course so

the most important point to realize is that banks are in the business of

selling money and therefore the risk regulations and restrain a very

fundamental the whole process therefore the loan products available to the

prospective customers the terms and conditions set for availing the facility

and the steps taken by the bank to protect its assets against the default

all have a very direct forbearance to the proper assessment of the great

so let's have a look at of what does a loan proposal look like the exact nature

of the proposals may vary depending on the subsequent glance but the elements

are generally the same to put things in a perspective let's consider the example

of one sanjay Saleha who is credit to credit it to be or one of the biggest

default has in recent history along with being one of the biggest businessman in

the world he owns multiple companies some sports

franchisee and few bank knows in all major cities who is the clients Exxon

jessileah reputed industrialists owning majority share in X Y Z limited and some

others second the quantum of credit they need and let X starting a new ally

division which would cater to the high and segment of the society credit

demands in closer to 25 million needed over the next 6 months

third the specific purpose the credit will be employed for X acquiring of new

aircrafts and capital for day-to-day operations like fuel cost of a

emoluments airport parking charges and etc fourth visa means to service debt

obligation which include application and processing fees interest principles and

other statutory charges fifth what protections I mean collateral can client

provide to in the event of default multiple bungalows in prime locations

offered as collateral along with the personal guarantees of mr. Sanjay celaya was

one of the most reputed businessman in the world what of the key areas of the

business and how are they operated and monitor that is a 0.6 detailed

reports will be provided on all key metrics related to the business so the

answer to this question helps the credit analyst who understand the broad risk

associated with the proposed loan and this question provides the very basic

information about the client and helps the analyst to get at very deeper in

business understanding in the intrinsic risk associate rule in now credit analyst

he obtaining the quantitative data of the clients other thing above the

questions the analyst also needs to obtain quantitative data specific to the

client the first is borrowers history the First is borrowers history and that

is the first is borrowers history a brief background of the company its its

capital structure its founder stages of development plans for growth list of

customer supplies service providers management structures products and

also to information are exhaustively collected to form a very fair and just

opion about the company as I can is your market data and basically the

specific industry trend over here has been analyzed the size of the market the

market share the assessment of the competition competitive advantage

marketing public relations and any relevant future trends are studies to

create a very holistic expectations of the future moments and needs the third

is that we analyze is the financial information that is the third thing

now what includes it includes the financial statements that is the best

case expected or case worst case I mean tax returns company valuations and

appraisal of assets current balance sheets credit references and all other

similar documents which can provide an insight into the financial health of the

company and a scrutinized in a very great in detail the fourth thing that

has been analyzed over here is the schedules and the exhibits now over here

certain key documents and such as like agreements with vendors and and

customers and insurance policies lease agreements pictures of the products or

size should be appended as exhibits to the loan proposal as a proofs of these

specifics as judged by the above-mentioned indicators it must be

understood that the credit analyst once convinced will act as lance advocate in

presenting the application the bank's loans committee and also guiding it

through the bank's internal procedures the details obtained are also used to

finalized the loan documentation terms rates and any special covenants which

needs to be stipulated keeping in mind the business framework of the client as

well as the macroeconomic factors now the credit analysis judgment after

collecting all the information now the analyst has to make a real judgment

regarding the different aspects of the proposal which will be presented to the

sanctioning committee the first thing that it includes is the loan okay as a

part of the judgment after understanding the need of the client one of the many

types of the loans can be tailored to suit the client's need amount the money

maturing maturity the loan expected user the proceeds can be fixed depending upon

the nature of the industry and creditworthiness of the company

the second is company now the market share of the company includes I mean

products and services offered major suppliers clients competitors should be

analyzed to ascertain its dependency on such factor the third thing of analysis

is credit history credit history fast is a very important parameter of or to

predict the future so therefore keeping in in line with the conventional wisdoms

clients pass credit accounts should be analyzed to check any irregularities or

defaults so this also allows the analyst to judge the kind of the client we are

dealing with and by checking the number of times late payments were made or what

penalties were imposed due to non-compliance with stipulated norms

okay the fourth important thing is the analysis of the market see analysis of

the of the concerned market is of the utmost importance as this helps us in

identifying and evaluating the dependency of the company on external

factors market structures size and amount of the concerned clients product

and clients product are important factors that analysis the analysts are concerned

with the credit errors ratio a company's financial contains the exact picture of

what business is going through and this quantitative assessment bears the it

bore significance analyst considers various ratios and financial instruments

to arrive at this picture what are though what are those particular ratios

which the analyst analyzes the first is the liquidity ratios is the first thing

that the analyze this ratios deals with the ability of the company to repay its

creditors expenses etc so this ratios are used to arrive at the cash

generation capacity of the company a profitable company does not imply that

it will meet all differential commitments the second type of ratio

that is a solubility ratio solubility ratios now this ratios deals with the

balance sheet items and are used to charge the future path of the company

which may follow the third is solvency ratio solvency ratios I mean basically

in this ratios are they specifically used to judge the risk

involved in the business this I mean this particular ratios takes into

account the picture of the increasing amount of the debts which may be

adversely affected by the long-term solvency of the company the fourth type

of the ratio that has been used is which they use for analyzing profitability

ratios and basically this ratios show the ability of the company to earn

unsatisfactory profit over the period of time the fifth type of ratio is the

efficiency ratios and this particular ratios provide the insights in the

management's ability to earn a return on the capital in the world and the control

they have on the expenses sixth type is close enough to cash flow and projected

cash flow analysis projected cash flow analysis now cash flow statement is one

of the most important instrument available to the credit analysis as I

mean this helps to gouge the exact nature of the revenue and the profits

flow so this helps them to get a very true picture about the movement of the

money in and out of the business the seventh type of analyst analysis of

ratio is collateral analysis okay now any security provided should be

marketable stable and transferable because this factors are very highly

important as failure on any of this France will lead to complete failure of

the obligation and the last and the most thing most important is the SWOT

analysis if you have heard about it SWOT analysis is strength weakness or

fortunately and threats if this is again various objective analysis which is done

to align the expectations and current reality with the market condition now

the credit rating the credit rating is the quantitative method using a

statistical model to assess the credit worthiness based on the information of

the borrower most banking information of the borrower most banking institutions

have their own rating mechanism this is done to judge under which this category

the borrower Falls and this also helps in determining the terms and condition

of various model use multiple quantitative and qualitative fields to

charge the borrow many bands also use the external rating agencies like

Moody's Fitch SNP I started in fluor which is also known

as etc to rate the borrowers which then forms a very important basis for

consideration of the loan what is the lessons water what is the

lesson that we have learned from mr. Sanjay celaya

so let's illustrate the whole excess with the help of an example of mr.

Sanjay celaya who

is a liquor parent and hugely respected industrialist who also

happens to own him very few sports franchises and it has a bungalow in the

most expensive locals he now wants to start his own airline and has therefore

approached you for a loan to finance the same the loan is is from for a migrate

of close enough to 1 million so as a credit analyst we have to assess whether

or not to go forward with the proposal to begin with will obtain in all the

required documents which are needed to understand the business model working

plan with other details of new proposal business necessary inspection and

inquiries undertaken to validate the veracity of the documents but

techno-economic viability can also be used to undertake to get an

opinion from the experts in aviation industry about the viability of the plan

when finally when we are satisfied with the overall efficacy of the plan we can

discuss the securities that will be that will collaterally cover our loan that is

partly or fully mr. Sanjay celaya being a very established industrialist holds a

very good reputation in the business world and therefore will hold very good

recommendations and such a proposal if met all of the aspects can be presented

for sanctions comfortability and comfortably and generally enjoys a very

good terms from the bank's light as a risk associate with such personalities

are always assessed to be less therefore to conclude mr. Sanjay celaya will get a

loan of $1,000,000 approved and will go on to start a airline business however the

future holds can never be predicted when a loan is sanctioned now let's make the

final conclusion on this particular note credit analysis is about making

decisions keeping in mind the past present and future as a credit analyst

2 days in life are never the same so the role the role offers a plethora of

opportunities to learn and understand different types of business as one

engages with the multitude of the clients hang a hailing from different

sectors not only is the career monetary rewarding but also helps individual

growing along with the providing good opportunities to building one's career

thank you