Credit Analysis And Ratings

Credit Analysis and Appraisal in Banks

Does a company or business possess the credit worthiness to be issued a loan?

This is one of the most fundamental functions of a bank. The rigour of this process often defines the long term health of a bank. Every corporate or business banker starts off his or her career learning this. Every 'Relationship Manager' first needs to master this.

Indian Banks have a massive Non-Performing Assets (NPA) problem. India's big NPA problem is because bankers failed to do their job - To evaluate businesses on merit and account for risks before handing out loans. This credit analysis and due-diligence is to be done by bankers trained in the areas of accounting, valuation, capital budgeting, forecasting, risk management etc. They also need to take into account the macro-economic situation and account for all risks. For e.g. a lot of bankers did not account for changes in the prices of commodities which had a direct impact on many companies' balance sheets which dealt in those commodities. 

Credit Analysis in Rating companies

Banks and Financial institutions often use credit ratings to decide who to lend money to. Global agencies look at sovereign ratings before deciding to invest in different countries. For e.g. India has been trying hard to get Moody's and other ratings agencies to upgrade its rating because of strong macro-economic fundamentals.

Finance professionals working in ratings agencies like S&P and Moody's carry out a detailed due-diligence of companies and countries to give out ratings which are used by financial institutions and other agencies. In India, you would be working with companies like CRISIL, CARE etc. in this field.

Similarly, agencies like CIBIL work to create a rating for every individual which is again used by banks and credit card companies to check credit worthiness of an individual.

Up Next

In the next chapter, learn about transaction banking.