23 May, 2013

Credit Investigation and Selection of Borrower

Sanctioning credit is the main function of a bank and it is the prime source of earning of a bank. So, a banker must sanction credit. But only sanctioning a lot of credit will not serve the purpose of the bank. It is only good credit that will serve the purpose of the bank. It is even better not to sanction any credit rather than sanctioning a bad credit. Selection of good borrower is the starting point of the process of creation of good credit. Before sanctioning credit, a banker wants to be sure about the repayment. For ensuring loan repayment a bank can go for preventing measure or curative measure or both. But curative measures are always costlier than preventive measures in terms of both time and money. So credit investigation as a preventive measure is required for selection of good borrower. Credit investigation and selection of good borrower may substantially help a bank in the recovery of extended credit.

Investigation, Credit InvestigationCredit is defined as the confidence of the lender on the ability and willingness of the borrower to repay the debt as per the schedule of payment. As per this definition, we must build confidence on the borrower’s ability and willingness. An in-depth analysis and investigation is a pre-condition for building confidence on the borrower’s ability and willingness.
Investigation refers to the careful and official examination of facts about something. It is also defined as a process of collecting information and evidences about something that helps to form an opinion about the subject under investigation.
Credit investigation refers to a process of carefully examining and assessing credit proposal and other information from different dimensions for the purpose of collecting information and evidences that will help forming an opinion regarding the credit. Credit investigation helps greatly in the process of selecting quality borrower.

Stages of Credit Investigation and Selection of Borrower
Credit investigation and selection may be completed in the following three stages: One, collecting information; Two, assessing collected information; and three, preparing credit report forming an opinion. 
Collecting Information
A lot of sources are there to collect information. Such as,
1.    Personal Interview
2.    Loan application
3.    Published Financial Statements, if any
4.    Physical verification and observation
5.    On line CIB
6.    Confidential report from other banks
7.    Registration records
8.    Information from credit rating agency
9.    Press reports regarding purchase, sale, pending cases or verdict of cases.
10.    Utility services bill payment
11.    Tax Authority
12.    Competitors

Assessing Collected Information
It is a vital step in the process of credit investigation and preparation of credit report. Once the information is collected, it must be assessed from different dimensions. Such as
1.    Giving input to the Financial Spread Sheet(FSS) or other Software
2.    Conduct CRG analysis to determine the risk grade. CRG analysis includes the assessment of five types of risk. Such as Financial risk, Business or Industry Risk, Management Risk, Security Risk, Relationship risk
3.    Determine the status of the loan seeker considering 5 C’s, 5P’s. Five C’s include character, capacity, capital, and condition, collateral. Similarly, 5P’s include person, purpose, product, place, profit.
4.    Conduct SWOT analysis
5.    Review the technical, managerial, marketing and financial aspect
6.    Overview regulatory environment, impact on natural environment.
Preparing Credit Report and forming Opinion
Report is a media of communicating information. It may be formal or informal. In case of a formal report, it is required to follow certain standard format. Credit report is a summary of the information collected or obtained from observation and investigation. It is an example of a formal report. So it is required to follow a specified format. The format of credit report is usually designed by the concerned bank. So it may differ from bank to bank. Since the format differs from bank to bank, the information to be included in the credit report may also differ. Generally, a credit report should include all relevant information needed to form an opinion or to take credit decision. A contemporary credit report may include but not limited to the following:
•    Name & Address
•    Nature of the Firm & Date of Establishment
•    Nature of Business
•    Investment in the Business
•    Subsidiary, if any
•    Net Sales
•    Annual Net Income
•    Market Reputation
•    Means of Finance
•    Particulars of Bank account
•    Particulars of Owners
•    Nature & Value of Securities
•    CRG Score, if applicable.
•    SWOT analysis summary
•    Technical soundness
•    Rating Information
•    Marketability of the products
•    Impact of the product on the society and its environment
•    Recommendation as to whether the loan should be granted or not.
•    Extracts from the credit policy.
•    Any other vital information that may affect the credit decision.

Selection of Borrower
On the basis of recommendation made in the credit report, the responsible credit officer will re-assess the position of the borrower and may ask for further clarification from the person who has prepared the credit report. If the borrower seems to be prospective, he is finally selected for disbursing credit.