hello friends welcome to the channel of
Wallstreetmojo will we are going to discuss a too-tall on credit analysis
topic credit analysis in limit terms great analysis is more about
identification of what of risk in situation where a potential for landing
is observed by the banks both quantitative and qualitative assessment
forms a very part of the overall appraisal of the clients in terms of
companies and individuals so this in general helps to determine the entity’s
debt servicing capacity or its ability to repay in this particular Too – tall we
are going to look at create analysis from them from beginners point of view
now what is created on as a secret analysis is basically a process of
drawing conclusions from available data it can be both qualitative and
quantitative regarding the credit worthiness of the entity and making
recommendations regarding the perceived needs and risk so credit analysis is
also concerned with the identification and evaluation and mitigation of the
risk associated with an entity’s failing to meet financial commitments let’s
understand the credit analysis process now below is the diagram that shows the
overall credit analysis process it starts from proposal then inspection is
done and and then then financial secured scrutiny and market review post that
scenario there is a presentation of the proposal that is done and it has been
pitched the sanction of the assessment after after screening or various things
which are important enough the data coalition is done any analysis of
various parameters or any any nitty gritties that needs to be followed a
credit rating is done presentation for these sanctions and if there are any
cancellations and things that needs to be added and all is been done some terms
and conditions which needs to be pitched in because if that will be formed that
will form a part of it so that any conflict of interest can be avoided and
then for a final thing is the approval of the process so what does a credit
analyst look for see ever wondered why bankers ask so many questions and make
you will so many forms when you apply for a loan
don’t some of them feel intrusive and repetitive and whole process of
submission of various document seems cumbersome you just try to fat them as
to what they do with all this data huh and what they are actually trying to
assert him it is definitely not only your your your deadly chaja will attract
a personality that makes you good potential borrower obviously there is
more to that particular story so here will try to gain get an idea about what
exactly a credit analyst is looking for so it is bifurcated into the Phi C’s the
first C is going to be the character now this character this is a part where the
general impression the impression of the protective borrower is analyzed the
lender forms a very subjective opinion about the trust worthiness of the entity
to repay its loan discreet inquiry is a background and experience level market
opinion at various other sources can be availed to collect qualitative
information and then an opinion can be found whereby he can take a decisions
about the character of the entity the second C is called the capacity the
capacity over here refers to the ability of the borrower to service the loan from
the profit generated by the investments now this is perhaps the most important
of the 5 factors the LAN the lenders will will calculate exactly how the
repayment is supposed to take place and cash flows from the business from the
timing of payment of a repayment and probability of the successful or
repayment of the loan and payment of history and such of the factors are
considered to arrive at probable capacity of the entities to repay the
loan so the first C was character the second was capacity the third is capital
the capital is the borrower’s own skin of the business this is seen as the
proof of the borrower’s commitment to the business this is an indicator how
much the borrower’s is at risk if the business fails and
lenders expect a decent contribution from the borrower own asset and personal
financial guarantee to establish that they have committed their own funds
before asking for the funding so good capital goes on to strengthen trust
between the lender and the borrower the next is the collateral or the guarantees
the collateral are the form of security that the borrower provides to the lender
to of to appropriately loan in case it is not
repaid from the returned as established at the time of availing the facility
guarantees on the other hand are the documents promising the repayment of the
loan from someone else generally from family members or friends if the
borrower fails to repay the loan getting adequate collateral or guarantee it has
made deemed fit to cover partly or wholly the loan amount bears huge
significance so this is a way to mitigate the default risk many times
collateral security is also used to offset any distasteful factors that may
have come to forefront during the assessment process conditions that
describes the purpose of the loan I mean that’s the last thing the conditions
that lassie condition describes the purpose of the loan as well as the terms
under which the facilities sanction purposes can be working capital
purchases of additional equipment inventory or for long term investment so
the lender considers various factors such as macroeconomic conditions
currency positions and industry health before putting forth the condition for
the facilities let’s analyze the credit analysis case study from the time
immemorial immemorial there has been an internal conflict between the
entrepreneur business and an N and bankers regarding the quantification of
the credit the resentment on the part of the business owner arises when he
believes that the bankers might not be fully appreciating his business
requirement needs and might be underestimated the real scale of the
opportunity that is assessable to him provided he gets sufficient quantum of
loan however the credit analysis might be having his own reasons to justify the
amount of risk his ready to bear which may include bad experiences with that
particular sector or his own assessment of the business requirements many a
times there are also internal norms or regulations which forced the analyst to
follow a more restrictive de course so the most important point to realize is
that banks are in the business of selling money and therefore the risk
regulations and restrain a very fundamental the whole process therefore
the loan products available to the prospective customers the terms and
conditions set for availing the facility and the steps taken by the bank to
protect its assets against the default all have a very direct forbearance to
the proper assessment of the great so let’s have a look at of what does a
loan proposal look like the exact nature of the proposals may vary depending on
the subsequent glance but the elements are generally the same to put things in
a perspective let’s consider the example of one sanjay Saleha who is credit to
credit it to be or one of the biggest default has in recent history along with
being one of the biggest businessman in the world
he owns multiple companies some sports franchisee and few bank knows in all
major cities who is the clients Exxon jessileah reputed industrialists owning
majority share in X Y Z limited and some others second the quantum of credit they
need and let X starting a new ally division which would cater to the high
and segment of the society credit demands in closer to 25 million
needed over the next 6 months third the specific purpose the credit
will be employed for X acquiring of new aircrafts and capital for day-to-day
operations like fuel cost of a emoluments airport parking charges and
etc fourth visa means to service debt obligation which include application and
processing fees interest principles and other statutory charges fifth what
protections I mean collateral can client provide to in the event of default
multiple bungalows in prime locations offered as collateral along with the
personal guarantees of mr. Sanjay celaya was one of the most reputed businessman in
the world what of the key areas of the business and how are they operated and
monitor that is a 0.6 detailed reports will be provided on all key
metrics related to the business so the answer to this question helps the credit
analyst who understand the broad risk associated with the proposed loan and
this question provides the very basic information about the client and helps
the analyst to get at very deeper in business understanding in the intrinsic
risk associate rule in now credit analyst he obtaining the quantitative data of
the clients other thing above the questions the analyst also needs to
obtain quantitative data specific to the client the first is borrowers history
the First is borrowers history and that is the first is borrowers history a
brief background of the company its its capital structure its founder stages of
development plans for growth list of customer supplies service providers
management structures products and also to information are exhaustively
collected to form a very fair and just opion about the company as I can is
your market data and basically the specific industry trend over here has
been analyzed the size of the market the market share the assessment of the
competition competitive advantage marketing public relations and any
relevant future trends are studies to create a very holistic expectations of
the future moments and needs the third is that we analyze is the financial
information that is the third thing now what includes it includes the
financial statements that is the best case expected or case worst case I mean
tax returns company valuations and appraisal of assets current balance
sheets credit references and all other similar documents which can provide an
insight into the financial health of the company and a scrutinized in a very
great in detail the fourth thing that has been analyzed over here is the
schedules and the exhibits now over here certain key documents and such as like
agreements with vendors and and customers and insurance policies lease
agreements pictures of the products or size should be appended as exhibits to
the loan proposal as a proofs of these specifics as judged by the
above-mentioned indicators it must be understood that the credit analyst once
convinced will act as lance advocate in presenting the application the bank’s
loans committee and also guiding it through the bank’s internal procedures
the details obtained are also used to finalized the loan documentation terms
rates and any special covenants which needs to be stipulated keeping in mind
the business framework of the client as well as the macroeconomic factors now
the credit analysis judgment after collecting all the information now the
analyst has to make a real judgment regarding the different aspects of the
proposal which will be presented to the sanctioning committee the first thing
that it includes is the loan okay as a part of the judgment after understanding
the need of the client one of the many types of the loans can be tailored to
suit the client’s need amount the money maturing maturity the loan expected user
the proceeds can be fixed depending upon the nature of the industry and creditworthiness of the company the second is company now the market
share of the company includes I mean products and services offered major
suppliers clients competitors should be analyzed to ascertain its dependency on
such factor the third thing of analysis is credit history credit history fast is
a very important parameter of or to predict the future so therefore keeping
in in line with the conventional wisdoms clients pass credit accounts should be
analyzed to check any irregularities or defaults so this also allows the analyst
to judge the kind of the client we are dealing with and by checking the number
of times late payments were made or what penalties were imposed due to
non-compliance with stipulated norms okay the fourth important thing is the
analysis of the market see analysis of the of the concerned market is of the
utmost importance as this helps us in identifying and evaluating the
dependency of the company on external factors market structures size and
amount of the concerned clients product and clients product are important factors
that analysis the analysts are concerned with the credit errors ratio a company’s
financial contains the exact picture of what business is going through and this
quantitative assessment bears the it bore significance analyst considers
various ratios and financial instruments to arrive at this picture what are
though what are those particular ratios which the analyst analyzes the first is
the liquidity ratios is the first thing that the analyze this ratios deals with
the ability of the company to repay its creditors expenses etc so this ratios
are used to arrive at the cash generation capacity of the company a
profitable company does not imply that it will meet all differential
commitments the second type of ratio that is a solubility ratio solubility
ratios now this ratios deals with the balance sheet items and are used to
charge the future path of the company which may follow the third is solvency
ratio solvency ratios I mean basically in this ratios are they specifically used
to judge the risk involved in the business this I mean
this particular ratios takes into account the picture of the increasing
amount of the debts which may be adversely affected by the long-term
solvency of the company the fourth type of the ratio that has been used is which
they use for analyzing profitability ratios and basically this ratios show
the ability of the company to earn unsatisfactory profit over the period of
time the fifth type of ratio is the efficiency ratios and this particular
ratios provide the insights in the management’s ability to earn a return on
the capital in the world and the control they have on the expenses sixth type is
close enough to cash flow and projected cash flow analysis projected cash flow
analysis now cash flow statement is one of the most important instrument
available to the credit analysis as I mean this helps to gouge the exact
nature of the revenue and the profits flow so this helps them to get a very
true picture about the movement of the money in and out of the business the
seventh type of analyst analysis of ratio is collateral analysis okay
now any security provided should be marketable stable and transferable
because this factors are very highly important as failure on any of this
France will lead to complete failure of the obligation and the last and the most
thing most important is the SWOT analysis if you have heard about it SWOT
analysis is strength weakness or fortunately and threats if this is again
various objective analysis which is done to align the expectations and current
reality with the market condition now the credit rating the credit rating is
the quantitative method using a statistical model to assess the credit
worthiness based on the information of the borrower most banking information of
the borrower most banking institutions have their own rating mechanism this is
done to judge under which this category the borrower Falls and this also helps
in determining the terms and condition of various model use multiple
quantitative and qualitative fields to charge the borrow many bands also use
the external rating agencies like Moody’s Fitch SNP
I started in fluor which is also known as etc to rate the borrowers which then
forms a very important basis for consideration of the loan
what is the lessons water what is the lesson that we have learned from mr.
Sanjay celaya so let’s illustrate the whole excess
with the help of an example of mr. Sanjay celaya who is a liquor parent and
hugely respected industrialist who also happens to own him very few sports
franchises and it has a bungalow in the most expensive locals he now wants to
start his own airline and has therefore approached you for a loan to finance the
same the loan is is from for a migrate of close enough to 1 million so as a
credit analyst we have to assess whether or not to go forward with the proposal
to begin with will obtain in all the required documents which are needed to
understand the business model working plan with other details of new proposal
business necessary inspection and inquiries undertaken to validate the
veracity of the documents but techno-economic viability can also be
used to undertake to get an opinion from the experts in aviation
industry about the viability of the plan when finally when we are satisfied with
the overall efficacy of the plan we can discuss the securities that will be that
will collaterally cover our loan that is partly or fully mr. Sanjay celaya being
a very established industrialist holds a very good reputation in the business
world and therefore will hold very good recommendations and such a proposal if
met all of the aspects can be presented for sanctions comfortability and
comfortably and generally enjoys a very good terms from the bank’s light as a
risk associate with such personalities are always assessed to be less therefore
to conclude mr. Sanjay celaya will get a loan of $1,000,000 approved and will go
on to start a airline business however the future holds can never be predicted when
a loan is sanctioned now let’s make the final conclusion on this particular note
credit analysis is about making decisions keeping in mind the past
present and future as a credit analyst 2 days in life are never the same so
the role the role offers a plethora of opportunities to learn and understand
different types of business as one engages with the multitude of the
clients hang a hailing from different sectors not only is the career monetary
rewarding but also helps individual growing along with the providing good
opportunities to building one’s career thank you