11Cs for better credit analysis in Asia
Loan default is a universal phenomenon associated with all types of business enterprises. However, loan default in case of banks has special significance because extending of credit is almost the exclusive business of banking institutions. Naturally magnitude of loan default largely determines the destiny of a bank. So, its importance is absolute for the very existence of a bank. As banks deal with other people’s money, quick recovery of loans is one of the most important factors that banks make commercially viable. Investors and entrepreneurs may default in paying their loans for various reasons. Some of the reasons are as follows: * When an entrepreneur takes up any project, he/she makes a project profile. The main goals, objectives and the cost of production are set out there. Likewise, the importers are also required to submit their project profile showing therein the proposed rate of profit to the Bank for the purpose of obtaining the loan. Here, it is seen that some entrepreneurs prepare over invoiced proposals in their bids for extra money from the banks for personal gain. * Some industries turn sick despite getting adequate loans from banks. The main reasons for this are weak management, wrong recruitment and administration of the standard of the commodity and not following correct marketing procedures. * Inadequate prudential regulation and weak supervision is a recipe for banking problem i.e. creating non-performing assets. * Poor prudential regulation and supervision are made all the worse by an inadequate legal framework. * Banks are not the only problem in the financial sector. Capital market is small and do not offer a competitive alternative bank borrowing. * Many of the classified loans are directive loans which actually given by influence. For any influence, the banks have to lend money to projects without examining their economic viability. * Ignorance of knowledge for proper analyzing of loan proposal by credit officers. * Negligence of the credit officers. Many credit officers do not perform his/her assignment sincerely despite getting all possible information about the respective credit. * Connivance of the Bank personnel with the borrower.
The recovery in fact starts from the selection of borrower. When a loan applicant approaches a loan officer’s/credit officer’s desk or calls over telephone for a loan, then he/she has to look upon each loan request as a challenge and an opportunity, not as a chore. It is well known that banks have pressing problems owing to bad credits in Bangladesh. To improve the credit portfolio better credit analysis is essential. Through good credit analysis, we can reduce the volume of bad or classified loans and it helps to form a good economic infrastructure for any country. In this article, it has been emphasized upon 5 C’s for good credit and 5 C’s for bad credit and other 1C for good and bad credit which can be used as a lending tool for any credit officer. First, lenders must know the Cs of good credit. These Cs are the tried and true rules of good loan making’ consisting of Character, Capacity, Condition, Capital and Collateral. These traditional five Cs make the core of sound commercial loan making. However, first of all after all analysis we have to believe that credit will be good and it will be refunded as per schedule. As we know that the word “credit” comes from the Latin word “credere”, which means "to believe" or "to entrust". Character
Character refers to the likelihood that a credit customer will try to repay the debt. This factor is of considerable importance because every credit transaction implies a promise to pay. The principal question is: Will the firm (borrower) make an honest effort to pay the debt, of is it likely to try to get away with something? Experienced credit managers frequently insist that the moral character of a borrower is the most important issue in a credit...
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