Credit appraisal is a skill which has to be acquired by study and supplemented by practice. The credit managers of banks and Non Banking Finance Companies (NBFCs) are duty bound to accept or reject a proposal on the basis of its viability or non - viability.
Credit appraisal is done by banks or financial institutions by obtaining credit information of the borrower. A Bank or Financial Institution considers following Parameters for appraisal of Loan application.
The borrower should make sure that the following information required for processing credit requests are collected by the company for submitting it to the bank or financial institution in order to obtain the required credit facility:
This should include the following:
The company should highlight key industry players as well as provide comparison of its performance and standing in the industry compared with its competitors. Information should also be provided on the following:
The company’s competitive advantages vis-à-vis the other players giving details of the critical success factors:
The company is required to provide:
Details of the planning, controlling and monitoring systems which have been put in place have to given.
Financial statements contain a wealth of information. If properly analyzed and interpreted, they can provide valuable insights into a firm’s performance and position. Financial analysis determines the significant operating and financial characteristics of a firm form accounting data and financial statements. The goal of such analysis is to determine the efficiency and performance of the firm’s management as reflected in the financial records and reports.
Analysis can be done through:
A. Ratio Analysis
B. Trend analysis
C. Reading of notes to accounts and other information
A. RATIO ANALYSIS:
Ratio analysis is the science of deriving certain conclusions by a study of such ratios.
Some uses of ratios are:
The ratios to be looked into are:
B. TREND ANALYSIS:
Trend analysis can be through:
a. Intra firm comparison that is review of the trend of the ratios over the years within the firm and
b. Inter firm comparison.
The trend analysis may even be related to absolute figures, such as growth in rates, net worth etc.
C. NOTES TO ACCOUNTS
Financial statements are dressed - up accounts to give the best possible performance outlook of a company. Careful reading and analysis of the notes on accounts, one can gauge the policies of the management, performance of the company, and its future planning.
These can be obtained from:
These would include:
Last the most important thing is CIBIL Score. CIBIL Score plays a critical role in the loan approval process. Your credit score gives loan providers an indication of your capability to pay back a loan. Every lender that uses the Cibil score has its own benchmark of what constitutes a “good score”.