Scribd Logo
Upload

Welcome to Scribd!

  • 104 views

    Credit Appraisal

    Uploaded by

    Divya Valsan
    The document discusses principles and processes for credit appraisal and risk management, including assessing the 5 C's of borrowers (character, capacity, capital, collateral, and cash flow), establishing a credit risk matrix, and following rules for sound credit administration such as diversifying loans, avoiding overconcentration, and basing loans on adequate collateral and financial position. It provides guidance on proactively analyzing credit risk, monitoring borrowers, and selecting those most suitable for loans.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Credit Appraisal

    Uploaded by

    Divya Valsan
    104 views10 pages
    The document discusses principles and processes for credit appraisal and risk management, including assessing the 5 C's of borrowers (character, capacity, capital, collateral, and cash flow), establishing a credit risk matrix, and following rules for sound credit administration such as diversifying loans, avoiding overconcentration, and basing loans on adequate collateral and financial position. It provides guidance on proactively analyzing credit risk, monitoring borrowers, and selecting those most suitable for loans.

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses principles and processes for credit appraisal and risk management, including assessing the 5 C's of borrowers (character, capacity, capital, collateral, and cash flow), establishing a credit risk matrix, and following rules for sound credit administration such as diversifying loans, avoiding overconcentration, and basing loans on adequate collateral and financial position. It provides guidance on proactively analyzing credit risk, monitoring borrowers, and selecting those most suitable for loans.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    104 views10 pages

    Credit Appraisal

    Uploaded by

    Divya Valsan
    The document discusses principles and processes for credit appraisal and risk management, including assessing the 5 C's of borrowers (character, capacity, capital, collateral, and cash flow), establishing a credit risk matrix, and following rules for sound credit administration such as diversifying loans, avoiding overconcentration, and basing loans on adequate collateral and financial position. It provides guidance on proactively analyzing credit risk, monitoring borrowers, and selecting those most suitable for loans.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 10

    CREDIT APPRAISAL

    Credit appraisal and management is concerned with the


    degree of risk of non-payment that is acceptable.
    Credit risk management may be performed scientifically
    and subjectively; fundamentally the decision to lend
    remains subjective in nature.
    Decision making more complex because:
    - Lack of documentation
    - Lack of entrepreneurship
    - Common psyche of Tax evasion
    - Lack of standardized book keeping
    - High growth of informal sector
    - Poor corporate governance
    Credit risk management policy will depend on:
    - Proactive, well-calculated, conscientious and
    objective credit analysis
    - Methodological, well-executed monitoring of
    client’s business during the loan tenure
    - Requires high levels of prudence in selecting
    the right borrower, for the right loan, carrying
    maximum return
    Principals of Lending
    1. Safety: Character, capacity, capital, collateral,
    condition, (Cash flows)
    2. Liquidity: Funds are not blocked for undue long time.
    Financial position allows repayment of loan on short
    notice
    3. Dispersal: Diversification of loans in various sectors,
    to a large number of clients
    4. Remuneration: Earnings from the loan should
    generate sufficient profits
    5. Suitability: In conformity with credit policy of the
    institution and overall national policy
    C’s of Risk Assessment
    1. Character: Borrower’s background, past
    success rate, market reputation, record of
    honouring obligations. Honesty, integrity, good
    habits.
    2. Capacity: Ability to repay the loan,
    management capacity to run the business
    successfully and ensure bright future
    prospects. Experience in the line of business.
    3. Capital: Represents money invested by the
    owner of business. Indicates his level of
    confidence, and the financial status in terms of
    interest cover, liquidity and loan repayment
    4. Condition: General economic conditions and
    specific conditions that might influence the
    customers’ ability to pay.
    5. Collateral: Are Assets or guarantees
    necessary and available as security.
    6. Cash Flow: Positive cash flow match
    repayment schedule.
    CREDIT RISK MATRIX

    Cs CAMELS CREDIT RATING


    - Character - Capital - SWOT Analysis
    - Capacity Adequacy Strength, Weaknesses,
    - Capital - Asset Quality
    - Condition - Management Opportunities, Threats.
    - Collateral Soundness - A1+ - Highest capacity
    - Cash Flows - Earnings
    - Liquidity for repayment on time.
    - Sensitivity to - A1 – Strong Capacity
    the market
    A2 – Satisfactory capacity susceptible to adverse

    changes in conditions.
    A3 – Adequate capacity more susceptible to
    adverse changes.
    B – Susceptible to adverse changes.
    C – Inadequate capacity.
    D – High risk.
    RULES OF SOUND CREDIT
    ADMINISTRATION
    - No lending officer should ignore the
    fundamental rules of sound credit
    administration.
    - Diversify loans to avoid over concentration to
    borrowers of any one type of business or
    industry sector.
    - Avoid concentration of loans to a single
    borrower, or to a few large borrowers.
    - Base secured loans on adequate collateral of
    sound investment quality.
    (Continued) Rules of Sound Credit
    Administration

    - Base granting of all loans not secured by ample


    investment collateral upon liquidity of the
    borrower’s financial position and on favourable
    managerial and economic factors.
    - Do not become a partner in a business to which
    you lend.
    - Require accurate and adequate financial and
    operating (profit and loss) statements.
    (Continued) Rules of Sound Credit
    Administration

    - Schedule loan maturities to correspond with the


    business cycle (production or distribution) of the
    borrower so there will be a definite workable
    plan for repayment.
    - Avoid continuous loans and insist on complete
    liquidation at maturity.
    - Scrutinize most carefully loans where social,
    personal or factors other than business ones
    apply.

    You might also like