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