Any financial institution will determine the creditworthiness of the loan seeking entity, before granting funds. A credit analyst plays an important role in this case, by studying the financial health of the loan seeker.
Let’s understand this with a simple example –
A bank has received an application for an INR 30 lakh home loan from an individual. Another bank has received an application for the issuance of a credit card. A non-banking lending institution has been approached by a firm for a loan of INR 1 crore for expansion purposes. A Credit Rating agency is deciding which of Country A and Country B is more credit-worthy.
What is common between all these? A Credit Analyst will be required to work on each of these cases to find out if it’s safe to lend / issue credit (cards) to these entities.
Credit Analysis entails researching and analyzing the debt profile and debt servicing abilities of individuals, companies or even sovereigns (i.e. countries). A Credit Analyst therefore, is someone who finds out the creditworthiness of an entity (either an individual or company or country) depending on the demands of the situation. In the case of issuing loans, companies / individual borrowers are appraised to see if they have the ability to service the debt and also if it is safe to give out the loan. In the case of a credit card application, income streams and previous defaults etc. will be analyzed. In the case of countries, although more complex to analyze, the end result is the same – an assessment of risk – also called a ‘Credit Rating’. Below is a chart with rating categories used by 3 leading global Credit Rating agencies.
Credit Analysts are hired across several types of firms:
- Commercial Banks: These firms need to assess the risk involved in lending debt or issuing credit cards. They may check credit scores of borrowing individuals or scrutinize a company’s books to understand the credit risk.
- Credit Rating agencies: These firms are responsible for rating companies (or even countries) on the basis of their riskiness / credit-worthiness. Investors and analysts all across depend on these ratings for debt related transactions.
- PE firms and Investment Banks: These firms either invest / advise their clients on investing in debt instruments and hence often have their own Credit Analysis teams.
- Non-banking financial institutions: These are non-banking lending firms and often they lend to a riskier band of customers. Hence, Credit Analysis for them is essential.
- KPOs servicing the above companies: These firms are third party vendors providing Credit Analysis services to the companies mentioned above.