KMBNFM05 financial-and-credit-risk-analytics

1. CREDIT ANALYSIS
(ACCORDING TO AKTU
SYLLABUS)
Presented By
Vikash Barnwal
Assistant Professor
Kashi Institute of Technology

2. CREDIT ANALYSIS PROCESS
Credit Analysis is a process adopted by any Bank and any
financial institution to assess, evaluate and analyse about the
potential borrower’s Identity, Financial Position, – Repayment
Capacity, Integrity Etc.
Information collection
process
Analysing accuracy of the
information
Decision-making process

3. Information collection process:
 The very first step towards credit analysis is collecting every
possible information about the applicant.
 The character, the reputation of the person, financial stability, credit
history, ability to repay debt, the actual purpose of seeking debt etc.
Example: If the loan is for a project then the loan officer must
understand the objective of the project, financial feasibility of the
project, importance of the project as compared to others, the cash
burn in it and mainly the amount of loan that can be reasonably
disbursed for the loan.
 Many times banks do it through its special third party
inspection agencies which carry out the inspection on the field
on behalf of the bank. Based on the risk associated with the
profile as depicted by the agency, the bank decides whether to
move forward in the proposal or not.

4. ANALYSING ACCURACY OF THE INFORMATION:
 The individual borrower or the organisational project may submit all the
information as demanded by the loan officer, but it is for the lender to
verify if the given information is accurate and authentic. The credit
analyst or the loan officer would verify the valid identity card of the
borrower or in case of the organisation, the business license, the
partnership deed, the legal document, the certificate of incorporation, etc
 At this phase, the financial solvency of the potential borrower the
feasibility of the project, are important factors in credit analysis. The
analyst performs ratio analysis from the past and projected profit and
loss statements, balance sheets, cash flow statements, and other financial
statements of the project and analyzes each of them to arrive at a
conclusion before assessing the financial viability of the project. He
then makes a comparison of his own analysis and that provided by the
applicant.

5. DECISION-MAKING PROCESS
 The credit analyst tries to understand what impact the proposed loan
will have on enhancing the income and liquidity position of the
proposed borrower. A good indicator for this is the net cash flow of
the proposed borrower to pay back the loan and the interest
component along with other expenses within due time. The credit
analyst may also check the existing interest burden and fixed charge
liability of the proposed borrower.

6. CREDIT PROCESS
5 c`s Model or Credit process
1. Character: its involve a review of personal honesty, integrity,
trustworthiness and managerial skills. A banking officer also makes a
judgment of character based on your business plan, credit history
and the quality of your presentation.
2. Capacity/ Cash flow: this is the cash your business has to pay the
debt. A cash flow analysis helps us determine if you have the ability
to repay the loan
Character
Capacity/Cas
h flow
Capital
Condition
s
Collateral

7. 3. Capital: The capital structure of your company is important
to Bank because it helps determine the level of risk
associated with your loan request. Analysis of capitalization
includes a review of equity, total debt ,the value of Assets
and permanent working capital .
4. Condition: this refers to outside conditions that may affect
the ability of your business to repay your loan request.
Factor such as general economic condition or a large
concentration of sales to a single customer are evaluated
during our review of your loan application
5. Collateral: this provide the secondery source of repayment,
thereby minimizing the risk for bank. The amount and type
of collateral required depend on the type and purpose of the
loan

8. DOCUMENTATION
It means the Bank Credit Agreement, the other “Loan
Documents” as defined in the Bank Credit Agreement and any
other document or agreement entered into for the purpose
of evidencing, governing, securing or perfecting the
obligations in respect of the Bank Debt, as each
such agreements or instruments may be amended
or instruments may be amended,
supplemented, modified, restated, replaced, renewed refunde
d, restructured, increased or refinanced from time to time.

9. LOAN PRICING
Loan pricing means determining the interest rate for granting loan to creditors, be it
individuals or business firms. It is one of the most important, however difficult task in
lending funds to business firms & other customers. Because it is always very difficult
to exactly know what the actual loan risk a particular loan application is. Generally the
lender wants to charge a high enough rate to make sure that the loan will be profitable
as well as it will covers enough compensation against the default risk. On the other
hand loan price must be set low enough that helps the customers to find it easy for
successful repayment of loan.
Loan pricing is the process of determining the interest rate for granting a loan,
typically as an interest spread (margin ) over the base rate , conducted by the
bookrunners .
Loan Pricing Learning Objectives
 Identify loan types and their relative degree of profitability
 Define risk-adjusted return, and risk-adjusted return on capital
 Calculate and interpret an example risk rating
 Recommend pricing structures based on risk rating and loan type

10. ESSENTIAL ELEMENTS OF PROFITABLE LOAN
PRICING
There are (3) broad considerations in formulating an
appropriate loan pricing strategy. These are costs, risk,
and profit.
Cost
Risk
Profit

11. COSTS
 Cost of Funds – As with each attribute, there are
different ways this can be measured. The simplest is to
consider the institution’s interest expense.
 Capital Costs – To the extent a loan may impair capital,
and this should be a consideration.
 Overhead – Overhead is the institution’s cost to
operate. Again, with all of the elements, this can be
measured in different ways and can vary over time.
 Fixed Costs – Fixed costs are the fixed portion of the
expense of origination, processing, and servicing an
additional loan.
 Variable Costs – Variable costs are the variable portion
of the expense of origination, processing, and servicing
an additional loan.

12. RISK
Loan products carry varying degrees of risk, as do the credit characteristics
to which they are underwritten. Higher risk loans are more costly because of
the higher probability of default but they also have more carrying costs due
to servicing. Loans should have a risk premium assigned as part of the
pricing structure.
Profit
Finally, loans should have a margin above the aforementioned factors. This
represents the actual profit to the institution above its cost and taking into
account risk.

13. PROFITABILITY ANALYSIS
 the process of systematically analyzing profits derived from
the various revenue streams of the business.
 Profitability analysis is part of enterprise resource planning
and helps business leaders to identify ways to optimize
profitability as it relates to various projects, plans, or products.
It is the process of systematically analyzing profits derived
from the various revenue streams of the business.
 Profitability refers to the profits or gains a business makes in
relation to its expenses. Therefore, profitability analysis refers
to the process of calculating or analyzing the profits of a
business. It helps businesses identify their revenue streams
and where they can reduce their expenses to generate
maximum gains.