Credit Appraisal Methodology and Standards
Credit appraisal is an assessment of the various risks associated with repayment of the loan and analysis of credit worthiness of prospective borrowers.
A personal loan is a form of debt given to an individual by the company without seeking security or collateral from the borrower for the purpose of personal needs, such as durable goods, education, medical care, marriage and other expenses.
It is important from the borrower perspective to analyze the loan proposal. The borrower believed that company does not understand his/her credit requirements. From the company perspective, company may have a bad experience with similar type of borrowers who defaulted and would follow more stringent lending policy. It is most critical to mitigate risk by the company, to lend the loan to the right customer through proper assessment or appraisal of the loan proposal.
Following points were kept in mind during appraisal process:
- Who is the customer?
- How much amount they need and when?
- How will the loan amount be utilized and what is the specific purpose?
- How will the borrower service the debt obligation?
- What is the key metrics and how well are they measured, monitored and comprehend?
PARAMETERS FOR CREDIT ASSESSMENT:
Following parameters are used to determine the credit worthiness of the potential borrower in order to mitigate the risk of default.
Capacity: Capacity to repay is the most critical of all factors; it is the primary source of repayment of the loan. We will estimate the borrowing capacity by analysing applicant’s bank’s statements, which covers cash flow of applicant, timing of repayment of EMI of existing loans, cash deposits in the accounts , minimum and average balances in the accounts, returned cheques and the probability of successful repayment of the loan.
Capital: Capital is the money borrower personally invest in his/her intended personal expenses and is an indication of how much the other party is at risk. It is always expected that borrower contribute from own asset and has undertaken personal financial risk which depicts the seriousness in repaying the loans. Analysing bank’s statements, we get some indication of the same
Collateral or guarantee: Since this is unsecured loan thus, post-dated cheques are obtained. Salary slip , ITR , Form 16 , PAN No and Aadhar card gives comfort in case of non-repayment and we can initiate recovery process based on these documents.
Character: Based on scrutinizing documents, an opinion is formed as to whether or not a borrower is trustworthy to repay the loan or intention of repayment. Education qualification, background, quality of references, banking habits, and residential status provides a view on the character. Also, we assess the social behaviour (through social media platforms) to get an insight of career progression, experience as well as sentimental insight.
Physical Verification: Physical Verification is an important criteria for processing a loan application.
Credit Report: Credit report from Bureau is requested to check credit history , internal and external verification is completed before sending file to credit appraisal
Credit appraisal: Loan officer/credit officer evaluates the applicant documents by analysing above mentioned parameters. Based on analyses, total score of borrower is generated.
If total rating indicates an approval then, it would be referred to the borrower for his acceptances. If rating suggests for a review then, the assessment would be referred to Chief Risk Officer (CRO). CRO will review the same with CEO before providing the necessary approval.
If rating is negative then the loan application will be rejected.