5 simple steps of performing a credit analysis

As any borrower will tell you, the journey from loan application to approval is thorough. Credit analysts are diligent fact-checkers who examine every detail and number. They are razor-sharp, driven professionals trained to assess loan applications accurately. Without them, it will be difficult for banks and borrowers to trust each other.

Why is credit analysis so important? Money-lending institutions and banks must be able to collect their payments on time. Their business cannot survive if customers default on loans. A credit analysis is imperative to protecting the company’s interests and ensuring the borrower doesn’t take on more than he can manage.

There are processes to mitigate risks and protect the financial institution or bank from ruin.
Credit analysis helps companies to assess all potential risks and threats before assigning funds to the borrower.

As moneylending firms receive thousands of applications every day, a credit analysis team is brought on board to review and analyse every loan request. They confirm whether the client is in a stable financial position and can make regular payments. To put it bluntly, can they afford this loan? Will the bank face any risks? To know more, stay on the page as we explore how credit analysis is done.

How credit analysis is done accurately

Credit analysis is a methodological procedure that requires perfect execution in each step. It starts with the application submission. The analysts will spend some time investigating the accuracy and authenticity of the financial information given. They will examine the financial statements, reports, credit history, assets and liabilities to evaluate the borrower’s creditworthiness.

1. Gather financial information

When a potential client applies for a loan, they submit financial documents to substantiate their application. This is step one in how credit analysis is done. The analyst or manager must check all the paperwork, ensure nothing is missing and ask for additional documents. Once you have gathered all the required data, you can move on to the next step.

2. Verification of financial data

The credit analyst must check if all the documents are authentic. Due diligence is a big part of how credit analysis is done. You have to fact-check all data and ensure regulations are followed. You don’t want to approve a loan request only to find out later that there were irregularities and inaccuracies in the documents. This could lead to loan defaults. The borrower must be able to prove his financial solvency. The analyst will use different tools, such as ratio analysis or financial statement analysis, to verify the applicant’s fiscal status.

3. Calculation of creditworthiness

To establish the creditworthiness of a client, you must look at his credit history, payment history, financial statements, income and other data. Then, calculate the debt-to-income ratio that measures the debt payments to the monthly income. There are many devices for estimating creditworthiness.

You can use cash flow analysis, internal and external scorecards and credit scoring tools to evaluate financial data. There are also software tools such as Credit Risk Monitor, Analytics Credit Lens and S&P Global Market Intelligence Credit Analytics.

4. Use the 5 Cs of credit

The 5 Cs of credit are character, capital, collateral, capacity and conditions. They help evaluate risks and establish loan terms and rates. The 5 Cs are an essential part of how credit analysis is done.

5. Present your findings

The credit analyst or manager will collate all the research, verifications and financial data into a report or presentation. They will discuss the application and help to decide if a loan request is granted. Once they come to a decision, the applicant will be informed. This is how credit analysis is done in most financial institutions and banks.

Also Read – Credit Analyst | Process, Skills, Decisions, Scope, Courses.

How to become a credit analyst?

Here are the qualifications you need to learn credit analysis

1. Bachelor’s degree in commerce, accounting or finance
2. Master’s degree
3. Chartered Financial Analyst – (CFA)
4. MBA (finance)
5. Chartered Accountant
6. Financial Risk Manager

These are the skills every credit analyst must have

1. Excellent research skills
2. Analytical thinking
3. Proficient credit software skills
4. Quantitative skills
5. Technical knowledge
6. Good communication skills

Your training helps you take on the day-to-day job responsibilities such as

• Assess the creditworthiness of clients and companies.
• Use financial software, ratios and tools to calculate the fiscal health of a borrower.
• Research the financial background of every potential client.
• Carry out due diligence to verify that all documents submitted comply with company regulations.
• Identify and manage risk factors that could affect loan repayments.
• Present research and data-based reports to senior staff.
• Help to decide the fate of every loan application.

Also Read – 7 Top Duties and Responsibilities of a Credit Analyst

Why sign up for Proschool’s CFA course?

If you want to ace the CFA course, you should align yourself with one of the best coaching institutes in India. Proschool has a proven track record of successful students who have cleared the CFA exams. The institution is well-known for offering cutting-edge teaching methods and innovative training tools.

Their teaching philosophy is to engage students using real-world case studies and practical application of concepts. The professors are experts in the field, using their corporate acumen to give students an authentic taste of the boardroom in the classroom. The CFA program teaches you all you need to know to work in the finance and credit industry, including how credit analysis is done.

7 More reasons why Proschool is ideal for you

1. The CFA course is taught at coaching centres in major cities, including New Delhi, Mumbai, Kolkata, Pune, Chennai and Bangalore.
2. You can take online classes if a centre is not within your reach.
3. The faculty is known to share customised study plans, hold doubt-clearing sessions and revise the syllabus with students.
4. Students learn how credit analysis is done in the CFA course.
5. Proschool has over 2,000 practice papers, mock tests and learning videos to help you revise for the exam.
6. The elite placement program is accessible to Proschool students only.
7. You also learn valuable tips on how to give professional interviews and write resumes.

FAQs

What are the 3Rs of credit?

The 3Rs of credit are:

• Returns
• Risk-bearing ability
• Repayment capacity

They play a huge role in establishing the financial credibility of the potential borrower.

Do credit analysts need a strong background in maths?

Analysts use their math expertise during significant calculations. You also need to know how to use financial techniques. So yes, it does help to have a strong background in maths.

Can I become a credit analyst directing after graduation?

Yes, you can become a credit analyst after you receive your degree in economics, commerce or any finance-related domain. You can take the CFA course alongside your degree to learn more about credit and how credit analysis is done.

How is credit analysis done in banks?

Banks hire credit analysts to assess and calculate a potential client’s creditworthiness. The 5Cs of credit help in carrying out their analysis. These professionals often work in teams and report to a credit manager.

What documents are required for credit analysis?

When applying for a loan, the borrower will submit all relevant financial documents, such as proof of identity, address, financial statements, proof of cash flow, previous credit history, collateral papers and the loan application form.

What is a credit-analysis ratio?

Credit analysts use ratios when examining the fiscal health of a company or client. These include debt-to-assets ratios, leverage ratios, and liquidity ratios. They help assess an organisation’s financial health, identify trends, and compare companies to their peers.

What are the common mistakes to avoid in credit analysis?

Credit professionals can make errors when analysing the creditworthiness of a client. Type 1 and Type 2 errors occur when a bank wrongly identifies viable customers as ‘bad’ or vice versa and grants the loan to the wrong party. Then errors such as incorrect information or wrong payment history will register as false data and affect the final outcome of the analysis.

Credit professionals must be wary of making duplicate entries or omitting critical information. All of the above are mistakes that happen frequently. Credit analysts formally trained in how credit analysis is done tend to make fewer errors.

What are the challenges in credit analysis?

The biggest challenge is when the financial data is difficult to understand or analyse during due diligence. Credit analysts also have to deal with fluctuating markets and economic uncertainty that can directly affect the loan approval process.

Conclusion

In the credit industry, knowledge is power. Your expertise in how credit analysis is done will help you determine who is loan-worthy and who is not. Work towards getting the proper qualifications, like an MBA or a CFA, that will give you an edge over your peers. Credit analysts have exciting prospects in store, with many of them rising to leadership positions such as VP or director. A CFA certification also helps you move laterally into other prominent fields, such as corporate finance or portfolio management.