CREDIT APPRAISAL

 

Credit Appraisal Credit Appraisal is the process by which a lender/banker appraises the technical feasibility, economic viability and bankability including creditworthiness of the prospective borrower. It is a very important step in determining the eligibility of a loan borrower for a loan.

 

“A good thing, well begun, is half done”

Just like every bank charges different rates for different loans from different customers, in the same way, each bank has its own set criteria that one must satisfy to qualify as a certified borrower of money/assets from the bank.

 

All banks have their own rules to decide the credit worthiness of their borrowers. Creditworthiness of a customer lies in assessing if that customer is capable of repaying the loan amount in the stipulated time, or not.

Here also, every bank has its own methodology to determine if a borrower is creditworthy or not. It is determined in terms of the norms and standards set by the banks. Banks employ their own unique objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of their customers.

What are Credit Scoring and Credit Rating?

Bankers talk about credit scoring and credit rating in the same breath. Therefore, it is important to clarify the difference between credit scoring and credit rating. These are two entirely distinct concepts and are to be employed in distinctly different scenarios.

 

Credit scoring is a statistical technique that combines several pre-determined characteristics to form a single score to assess a borrower’s credit worthiness. The score allocated to any application is the sum of the appropriate weights given by the values that the included characteristics take for that application. Thus, any two identical applications will always receive the same score.

 

Credit rating, on the other hand, is based more on the experience and judgment of the credit officer and uses financial indicators as key. The objective of scoring is to replicate manual analysis and approval of loans at a lower cost, with greater speed, while the use of credit rating is reliant on manual analysis by credit officers to supplement the rating provided by the tool. Credit scoring uses a retail lending approach to credit screening/decision making and is recommended for smaller ticket size loans, where adequate reliable financial data about the borrower is not available. Credit Rating, on the other hand, is a more appropriate tool for larger, mid-segment or corporate loans which have relevant financial data/ business plans that provide the basis for further credit analysis and information.

 

Loan proposals can be appraised on any electronic platform. This will also generate the rating of the proposal so as to decide on the pricing. Some banks use automated processing for handling applications but use a judgmental method for the final credit decision. Approvals are followed by credit review functions including, credit extension, customer service, security and collections.

 

 

 

 

Criteria for Credit Appraisal:

  • Incomes Of Applicants And Co-applicants,
  • Age Of Applicants,
  • Educational Qualifications,
  • Profession,
  • Experience,
  • Additional Sources Of Income,
  • Past Loan Record,
  • Family History,
  • Employer/Business,
  • Security of tenure,
  • Tax History,
  • Assets Of Applicants And Their Financing Pattern,
  • Recurring Liabilities,
  • Other present and future liabilities and investments (if any).

 

 

The 3 methods used to arrive at Eligibility

1. Installment to Income Ratio (IIR)

2. Fixed Obligation to Income Ratio (FOIR)

3. Loan to Cost Ratio (LOCR)