What is Credit Appraisal?

It is the process by which a lender appraises the technical feasibility, economic viability and bankability including creditworthiness of the prospective borrower. Credit appraisal process of a customer lies in assessing if that customer is liable to repay the loan amount in the stipulated time or not.

THE 3 Cs ON WHICH THE BANK RELIES

CAPITAL It is the amount of funds contributed by the customer towards the business for which the loan is sought. CAPACITY The customer must have a sound knowledge and experience about the business. Without any experience or required knowledge, if a bank lends to the customer, the loan cannot be recovered as the customer will incur loss.

 CREDIT WORTHINESS The credit worthiness of individuals is assessed on past performance, goodwill, amount of asset and liability he/she has.

COMPONENTS OF CREDIT APPRAISAL PROCESS

While assessing a customer, the bank needs to know the following information:

Technical Feasibility Living standard Locality Telephonic verification Educational qualification References/Residential identity.

Economic Viability Installment to income ratio Fixed obligation to income ratio Loan to cost ratio Bankability Bank statements Business continuity proof Credit interview Profile of customer Security Ownership title CIBIL Report (Credit Information Bureau India Limited)

Others Incomes of customer Profession Experience Additional sources of income Past loan record Family history Tax history Assets and liabilities of the customer Investments(if any)

Scrutiny of securities The security offered by the customer is assessed by the bank. There are two types of securities: 1. Prime security- It is obtained by the borrower with the help of the loan. Eg; House in a housing loan 2. Collateral security- Additional security like insurance policy, immovable property etc. The banker takes into account the following aspects: Market value of the security- It should cover the loan and should not be obsolete. Time taken to realize the security- It should be of short duration, in case of fixed assets, it might take long duration. All legal aspects with regard to the title have to be clarified.

 Documents involved in the security- Documents such as pledge, mortgage, hypothecation or assignment have to be clearly executed. Fluctuation in the value of security- It takes place due to changes in the economy or government policies. The best possible margin may be 50-60% for short and medium term loans. Shift ability of the security- Refers to obtaining funds from other credit agencies against the security provided by the customer.

THANK YOU !

By, JASMINE ABRAHAM 3rd B.COM (VOC)