Credit Appraisal for Banking sector
The recent economic crisis has seen a spate of defaults on loans across banks and one of the key reasons behind this seems to be inadequate credit appraisal processes.
Importance of credit appraisal process
What risk assessment mechanisms are typically used to assess borrowers – with the increased focus post the global financial crisis, what changes have been made to strengthen the process?
In the past, organizations like IDBI and IFCI which were basically term lending institutions at that point of time, got into a lot of problems of high non-performing assets (NPAs) because they gave only term loans. They never kept the working capital accounts with them. That was being done by the various commercial banks and they were the ones who had the operation’s income from them.
The Bank take charge of the plant and machinery and the mortgage of the land.
The bank can also consider taking some collateral security but this is just a comfort factor, not the main source of recovery for the bank.
Know your borrower like the back of your palm:-
One thing we would stress a lot is regular contact with the customer.
Traditionally we say, know your borrower like the back of your palm. Judge the promoters also – their policies, their scheme of things, for example, if they have participated in a fair abroad, the number of enquiries they generated; the number of those enquiries that have fructified as orders and the number that have just remained as enquiries etc.
Then, their business clientele – are they spread out or are they just banking on 2-3 clients, how are they manning their receivables etc.
Faulty Credit appraisal:- one of the important reasons for the high NPAs is faulty credit appraisal. There was no in-depth appraisal at all and in a large number of accounts, people were being judged based on the fact that they were well known or that their company was well known.
Foreign credit appraisal firms incorporate non banking information into their credit rating process, which results in a more comprehensive process. Do you see this as a necessity in India and is it feasible to implement?
It’s like having complete knowledge of your customer. Even if you have the best account, everything won’t go well all the time. So you have to find out whether the promoter has the wherewithal to come out of a difficult situation i.e. how resilient your borrower is.
For this, you would need to know about everything, not just the balance sheet. That means their expertise, their experience, the people who head their departments, and their internal policies.
The fact is the economy has to grow so people have to be given loans so credit has to expand.
But it has to be done with proper analysis and reasoning based on data. It cannot be a wild goose chase and it shouldn’t be that kind of pressure. Then the quality of advance will definitely suffer.
We involve as third part analyst on the credit proposals by indicating risk areas independently, which can raise alarm bell well before disbursement of loan. Bankers willing to avail of our services, Please contact at email@example.com