Credit Risk Assessment

Topics: Interest, Debt, Credit Pages: 1 (307 words) Published: March 9, 2013
Credit Analysis
Credit analysis is a type of analysis which calculate the creditworthiness of a business by the bond portfolio manager. The analysis seeks to identify the appropriate level of default risk when a bank provides a lending to the business or individual (Credit Analysis , n.d.). According to Weerasooriya, the three basic principles that lead to lending decision are safety of loan, suitability of loan purpose and profitability. The first principles is the safety of loan which refers to how safe is the loan if the financial institutions approve the loan. A safe borrower is the one who has good characteristic, financially sound and has the ability and willingness to repay the loan. In order to increase the safety of loan, banks require a collateral from the borrower as it serves as a safety valve against unforeseen circumstances. The second principles is the suitability of loan purpose. A valid purpose is the one that is legal and conforms to the lending policy of banks. The third is the profitability. The banks need to compare the cost and the return of a loan before granting it as interest on loan is the major sources of income for the banks. (Sathye,M. & Bartle,J. & Vincent,M. & Boffey,R., 2002) To follow all the principles, financial institutions undergo a credit analysis for all loan purposes. The traditional way of credit analysis is the five Cs which proposed by De Lucia and Peters are character, capacity, capital, collateral and conditions. These five Cs will help financial institutions in judging the safety, suitability of loan and profitability.

Credit Analysis . (n.d.). Retrieved from investopedia.com: http://www.investopedia.com/terms/c/creditanalysis.asp#axzz2LB1NVV71 Sathye,M. & Bartle,J. & Vincent,M. & Boffey,R. (2002). Credit Analysis & Lending Management. John Wiley & Songs Austalian Ltd.
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