Lesson-2 on Credit

Question: How can you determine borrowers Creditworthiness?

Answer:

By 5 Ps

1. Person
2. Purpose
3. Products
4. Place
5. Profitability

5 Cs

1. Character
2. Capacity
3. Capital / Cash
4. Collateral
5. Conditions (Current Business condition, Performance, Sensitivity of changes)

Question: What are Characteristics of a good credit officer?

Answer:

1. Personal Characteristics

Ø     Honesty / Integrity

Ø     Industrious

Ø     Effective & Efficient

Ø     Self Motivated

Ø     Decision taking capacity

Ø     Ability to communicate / Negotiate

Ø     Diplomatic

Ø     Disciplined

Ø     Emotional Stability, etc

2. Knowledge about Business & Profession

Ø     Banking knowledge

Ø     Business Knowledge

Ø     Knowledge about the economy, marketing

Ø     Understanding legal rules & regulations

3. Knowledge about technology

Question: What are the different components of Credit Risk Grading (CRG) ?

Answer:

CRG: Principal risk component

1. Financial Risk (50%)
• Liquidity (10%)
• Profitability (20%)
• Leverage (10%)
• Coverage (10%)
2. Business Risk (18%)
• Size of the business (5%)
• Age of the business (3%)
• Business Outlook (3%)
• Competition (2%)
• Entry/Exit Barrier (2%)
• Growth                   (3%)
3. Management Risk (12%)
• Experience (5%)
• Succession (4%)
• Team Work (3%)
4. Security Risk (10%)
• Security Coverage (4%)
• Collateral Coverage (4%)
• Support (2%)
5. Relationship Risk (10%)
• Account Conduct (5%)
• Utilization of limit (2%)
• Covenants (2%)
• Personal Deposits (1%)

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