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Credit Analysis in Banking
Credit Analysis in Banking
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Agenda
In this session, we will discuss the following topics:
● Introduction to Credit Analysis
● Financial Statements Analysis
● Credit Risk Assessment
● Credit Underwriting Process
● Credit Policies and Procedures
● Collateral Evaluation
● Credit Documentation and Credit Risk Mitigation
● Credit Monitoring and Management
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Introduction to Credit Analysis
● Credit analysis is a critical process in the world of finance, particularly for banks and financial
institutions. It involves evaluating the creditworthiness of individuals, businesses, or entities seeking to
borrow money or obtain credit.
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Introduction to Credit Analysis (Cont’d)
● The primary goal of credit analysis is to assess the risk associated with lending money and to make
informed decisions about whether to approve or deny credit requests.
● It involves evaluating the creditworthiness of individuals, businesses, or entities seeking to borrow
money or obtain credit. The primary goal of credit analysis is to assess the risk associated with lending
money and to make informed decisions about whether to approve or deny credit requests.
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Types of Banks
Risk Assessment
Risk Management
Investor Confidence
Business Decision-Making
Economic Stability
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The Role of Credit Analysts in the Lending Process
● Risk Assessment
● Due Diligence
● Financial Analysis
● Credit Scoring
● Risk Mitigation
● Credit Policy Adherence
● Documentation
● Credit Approval
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Financial Statements Analysis
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Financial Statements
Balance Sheet:
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Financial Statements (Cont’d)
Income Statement:
● An income statement, also known as a profit and loss statement, summarizes a company's financial
performance over a specific period, such as a quarter or a year.
● It starts with total revenue (sales) and subtracts all expenses (cost of goods sold, operating expenses,
interest, and taxes) to arrive at net income or profit.
● The income statement helps assess a company's profitability and ability to generate earnings.
● Key ratios derived from the income statement include the gross profit margin, operating profit margin,
and net profit margin.
Income statement of XYZ Ltd, Year ended 31st March
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Financial Statements (Cont’d)
Cash Flow Statement:
● A cash flow statement provides information about a company's cash inflows and outflows during a
specific period.
● It is divided into three sections: operating activities, investing activities, and financing activities.
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Tools for Analysis of Financial Statements
Trend analysis
Ratio Analysis
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Introduction to Credit Risk Assessment
● Credit risk, also known as default risk or counterparty risk, refers to the potential loss that a lender or
investor may incur if a borrower or counterparty fails to meet their financial obligations by not repaying
a loan or debt as agreed.
● It's the risk of experiencing financial losses due to the borrower's inability or unwillingness to fulfill
their payment obligations.
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Types of Credit Risk
● Default Risk
● Credit Spread Risk
● Credit Concentration Risk
● Industry Risk
● Counterparty Risk
● Liquidity Risk
● Recovery Risk
● Legal and Documentation Risk
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Credit Underwriting Process
● Application Submission
● Data Collection and Verification
● Credit Report Review
● Credit Scoring
● Income and Debt Analysis
● Employment and Stability
● Collateral Assessment
● Loan Documentation and Funding
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Credit Policies
● Purpose and Objectives
● Scope
● Roles and Responsibilities
● Credit Approval Authority
● Risk Appetite and Tolerance
● Monitoring and Portfolio Management
● Credit Reporting and Information Security
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Credit Procedures
● Loan Origination
● Credit Analysis and Underwriting
● Loan Approval
● Loan Documentation and Closing
● Loan Disbursement
● Monitoring and Risk Management
● Reporting and Record-Keeping
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Collateral Evaluation
● Identification and Description of Collateral
● Valuation
● Ownership and Title Verification
● Lien Priority
● Collateral Sufficiency
● Collateral Insurance
● Collateral Maintenance
● Documentation
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Types of Collateral
● Real Estate
● Vehicles
● Equipment
● Inventory
● Accounts Receivable
● Cash Savings
● Jewelry and Valuables
● Crops and Livestock
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Methods for Valuing Collateral
● Appraisal by a Licensed Appraiser
● Automated Valuation Models
● Broker Price Opinion
● Vehicle Value Guides
● Inventory Appraisal
● Accounts Receivable Valuation
● Discounted Cash Flow Analysis
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Credit Documentation
● Loan Agreement
● Promissory Note
● Collateral Documentation
● Guarantee or Co-Signer Agreement
● Loan Disclosures
● Credit Reports and Credit References
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Credit Risk Mitigation Strategies
Collateral
Loan Covenants
Personal Guarantees
Insurance
Loan Diversification
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Summary
Here is a quick recap:
● Credit analysis is the process of evaluating the creditworthiness of individuals or businesses seeking
loans. It involves assessing financial stability, repayment capacity, and risk factors to make informed
lending decisions.
● Financial statement analysis is the examination of a company's financial statements to assess its
financial health, profitability, liquidity, and solvency.
● The credit underwriting process is a series of steps lenders follow to evaluate loan applications. It
includes data collection, credit analysis, income verification, collateral assessment, and decision-making
to approve or deny loans.
● Credit policies and procedures are guidelines that lenders and financial
institutions establish to ensure responsible lending practices. They cover areas
like risk tolerance, underwriting criteria, loan terms, and regulatory compliance.
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Summary
Here is a quick recap:
● Collateral evaluation is the process of assessing the value and quality of assets pledged by borrowers to
secure loans. It ensures that collateral provides sufficient security in case of default.
● Credit documentation refers to the legal agreements and contracts that define loan terms and
conditions. Credit risk mitigation involves strategies like collateral, loan covenants, and insurance to
reduce the impact of borrower defaults.
● Credit monitoring involves ongoing oversight of borrowers and loan portfolios to identify early signs of
financial distress. Credit management encompasses responsible lending practices, risk mitigation, and
collections strategies for problem loans.
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