5 ‘C’ s of Credit .

CHARACTER

Character addresses areas such as

integrity , management style (aggressive,
speculative, prudent or conservative),
management lifestyle ( thrifty or
extravagant) and willingness to repay.
 CAPACITY

Lenders need to assess the borrowers’

ability to generate the necessary cash
flows to repay borrowings. The
assessment often takes some form of
cash flow projection analysis.
 CAPITAL

Lenders need to assess the sufficiency of

shareholders or owners’ financial commitment
in their business relative to the permanent
assets owned by the business. Financial
commitment is often measured by
shareholders’ funds in the business and third
party collateral provided by the owners
themselves.
 CONDITIONS

This factor deals with external influences that can affect

the borrowers’ ability to honour their obligations to the
lenders. Macro issues such as globalization, foreign
currency markets, economies of major trading
partners, legislative and regulatory frame works and
social trend cannot be ignored. It is also important to
assess the technological environment to ensure that the
borrower remains relevant in the industry.
 Collateral

It is meant to compensate for any

weakness in the other four ‘C’ s, and
provide lenders with more comfort.
At best, collateral is a second way out
not the first way out.
REASONS WHY DIFFICULTIES AT A
BANK MAY GIVE RISE TO PUBLIC
POLICY CONCERNS:-
• HIGH PROBABILITY OF BANK RUNS
• HIGH PROBABILITY OF CONTAGION EFFECT
• HIGH COST OF BAILING OUT
• HIGH PROBABILITY OF WIDESPREAD
MACROECONOMIC CONSEQUENCES FROM
INSTABILITY IN THE FINANCIAL SECTOR
• LOSS OF CONFIDENCE IN FINANCIAL
INTERMEDIATION MAY RESULT IN SUB-OPTIMAL
LEVELS OF SAVINGS AND INVESTMENTS.