The road to the coveted career as a Credit Analyst | Process, Skills, Decisions, Scope and Courses.
Credit Analysis is a process adopted by any Bank and any financial institution to assess, evaluate and analyse about the potential borrower’s Identity, Financial Position, – Repayment Capacity, Integrity Etc. Every institution must have a streamlined process in place for credit analysis because there will be new borrowers every day and each day a crucial decision has to be made that whether or not to grant a loan to an individual. Hence, without a well-tested credit analysis process in place, it would be very difficult to close these decisions.
Thus, we can say that credit analysis is a methodical process by which the lender calculates the creditworthiness of an individual borrower or an organization. Sometimes even the company issuing bonds has to get credit analysis done. This job is done by the credit rating agency which is specially deployed for this purpose. They rate the ratings which are used for decision making. Credit analysis involves detailed financial analysis techniques, such as ratio analysis, trend analysis, financial projections as well as a detailed cash flow analysis.
What is the process of credit analysis?
The process of credit analysis is very detailed and deep, however, the entire process can be summarized into 3 basic steps:
Information collection process
The very first step towards credit analysis is collecting every possible information about the applicant. The character, the reputation of the person, financial stability, credit history, ability to repay debt, the actual purpose of seeking debt etc. If the loan is for a project then the loan officer must understand the objective of the project, financial feasibility of the project, importance of the project as compared to others, the cash burn in it and mainly the amount of loan that can be reasonably disbursed for the loan. Many times banks do it through its special third party inspection agencies which carry out the inspection on the field on behalf of the bank. Based on the risk associated with the profile as depicted by the agency, the bank decides whether to move forward in the proposal or not.
Analysing accuracy of the information
The individual borrower or the organisational project may submit all the information as demanded by the loan officer, but it is for the lender to verify if the given information is accurate and authentic. The credit analyst or the loan officer would verify the valid identity card of the borrower or in case of the organisation, the business license, the partnership deed, the legal document, the certificate of incorporation, etc. At this phase, the financial solvency of the potential borrower the feasibility of the project, are important factors in credit analysis. The analyst performs ratio analysis from the past and projected profit and loss statements, balance sheets, cash flow statements, and other financial statements of the project and analyzes each of them to arrive at a conclusion before assessing the financial viability of the project. He then makes a comparison of his own analysis and that provided by the applicant.
In case of individual applicants, the credit analyst assesses the pay slips, Form 16, Income tax returns etc. to authenticate the information and ensure everything is in compliance with the statutory regulations.
The credit analyst tries to understand what impact the proposed loan will have on enhancing the income and liquidity position of the proposed borrower. A good indicator for this is the net cash flow of the proposed borrower to pay back the loan and the interest component along with other expenses within due time. The credit analyst may also check the existing interest burden and fixed charge liability of the proposed borrower.
Based on the analysis the analyst ascertains the credit risk associated with a loan application of the individual or the project and takes a call if the level of risk is acceptable or not. He then forwards his assessment to the higher officers for approval who decide finally if the loan is to be disbursed or not. The terms of the loan are also decided at this stage.
Areas where credit analysts are employed
• Credit Departments of lending companies such as NBFC
• Credit Rating companies
• Consultancy firms
- The minimum educational requirement is a bachelor’s degree in finance, accounting.
• Knowledge of statistics, economics, ratio analysis, etc. is necessary.
• In-depth knowledge of Financial Modeling is very important for undertaking valuations of companies
IMS Proschool’s Programs for careers in Credit Analysis
Financial Modeling involves studying historical information (including credit profile), levels of income and free cash flows over the past few accounting periods, projected financial situation going forward, studying ratios inferred from financial statements (in case of a firm) and even status of projects undertaken (to determine whether the projects have been sound investments or not). The ultimate objective of all this is the projection of the firm’s future financial status and, accordingly, the assignment of a credit rating, which will determine the level of confidence investors have in the firm. View more.
Post Graduate Program Investment Banking & Capital Markets (PG IB&CM)
The PG IB & CM program, firstly, includes Financial Reporting Analysis which deals with inferring ratios from historical financial reports. These ratios can then be benchmarked longitudinally or by industry standards to arrive at a relative fiscal position of the firm, and a credit rating can be given accordingly. The program also involves the valuation of firms and M&A Advisory, which can be a very important guide to the future of the corporate scenario in the country. Credit Research is also an integral part of the program’s syllabus. View more info on Post Graduate Program Investment Banking & Capital Markets.