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Concept and criteria of creditworthiness of the customer

Category: Concept of the Bank and the Banking System

Creditworthiness of commercial banks’ clients — the ability of the borrower in full and on time to pay its debts (principal and interest).

Creditworthiness of the borrower, in contrast to its ability to pay does not fix the defaults in the intervening period or at any date, and predicts the ability to repay debt in the near future. The degree of insolvency in the past is one of the formal parameters, which are based on the assessment of customer credit quality. If the borrower is in arrears, and the balance of liquid and sufficient amount of equity capital, the single delay payments to the bank in the past do not justify a conclusion on the client’s insolvency. Creditworthy clients do not allow long-term non-payment to the bank, vendors, budget.

The level of creditworthiness of the client indicates the degree of an individual (private) bank risk associated with the issuance of a specific loan specific to the borrower.

World and domestic banking practice has separate criteria for creditworthiness of the customer: the nature of the client, the ability to borrow funds, the ability to earn money in the normal course of business to repay debt (financial capabilities), capital, collateral, conditions in which the credit transaction is made, control (the legislative framework the borrower with the nature of loans to bank standards and oversight bodies).

By the nature of the client understood his reputation as a legal entity and the reputation of managers, the degree of responsibility of the customer for debt repayment, the clarity of his presentation about the purpose of the loan, line of credit bank’s policy. Reputation of the client as a legal entity composed of the duration of its operation in this area, the relevant economic indicators averages from his credit history, reputation in the business world, its partners (suppliers, customers, creditors). Reputation management is evaluated on the basis of their professionalism (education, work experience), integrity, personal and family financial position, results of the relationship led their structures with the bank. Even with a clear understanding of client objectives sought the return of the loan is risky, if it is contrary to the approved cross policy (for example, violates the approved limits of individual segments of the loan portfolio).

The ability to borrow means that there is a client of the right to file an application for a loan, signature loan agreement or negotiation, ie the presence of certain powers of the representative of the company or companies coming of age, or other signs of capacity of the borrower — a natural person. Signing of the contract by an unauthorized or incompetent person means a greater likelihood of losses for the bank.

One of the main criteria of creditworthiness of the customer is his ability to earn money for debt repayment during the current activity. Known and the other position, as set out in the economic literature when creditworthiness is associated with the degree of capital investment in real estate. The latter is a form of protection against the risk of impairment of assets in an inflationary environment, it can not be a major feature of the borrower’s creditworthiness. The fact that the release of funds from an estate takes time. Investing in real estate associated with the risk of impairment. Therefore it is expedient to focus on balance sheet liquidity, efficiency (profitability) of the borrower, its cash flows.

Clients’ capital is not less important criterion in customer credit quality. It is important to these two aspects of its assessment: 1) it is sufficient, which is analyzed based on the established requirements for the minimum level of charter capital (equity) and the coefficients of financial leverage, and 2) the degree of equity investments credited to the operation, which indicates that the allocation of risk between bank and the borrower. The greater the investment of equity capital, the more interest the borrower to closely monitor credit risk factors.

Under the provision of credit means the assets of the borrower and a particular secondary source of repayment of the debt (mortgage, guarantee, surety, insurance), provided in the loan agreement. If the ratio of assets and liabilities is important for the loan of the bank in case of declaration of bankruptcy of the borrower, the quality of a particular secondary source guarantees the fulfillment of its obligations on time in financial difficulties. As collateral security guarantor, the guarantor and the insured are especially important when there is insufficient cash flow from the customer’s bank, problems with liquidity of its balance sheet and capital adequacy.

K conditions. which is committed credit operations are ongoing or forecast the economic situation in the country, region and industry, political factors. These conditions determine the degree of external risk of the bank and taken into account when deciding on the bank’s standards for evaluating cash flow, balance sheet liquidity, sufficient capital and management level of the borrower.

The latter criterion — control over the legislative framework of the borrower and the bank’s compliance with its standards zeroing banker to provide answers to the following questions: whether the legislative and regulatory framework for the functioning of the borrower and the implementation of the financed activities such as impact on the performance of the borrower’s expected change in legislation (eg tax ) how information about the borrower and the loan contained in a credit application, meet the standards of the bank, as recorded in the instrument of credit policy and the standards of banking supervision, controlling the quality of loans.

Set out criteria for assessing the creditworthiness of the bank’s customer and define the contents of ways to assess it. These methods include:

assessment of business risk;

assessment management;

assessing the financial stability of the client on the basis of financial ratios;

analysis of cash flow;

collecting customer information;

oversee the work of the client by entering the place.

Despite the unity of the criteria and methods of evaluation, there is specificity in analyzing the creditworthiness of businesses and individuals, large, medium and small clients. This specificity is a combination of methods of assessment used, as well as their content.

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