"Why Credit Analysis is More than just Data- It's Strategy"

Know Your Customer (KYC)

• KYC involves collecting and verifying documents like government-issued IDs, proof of address, and tax identification numbers.
• It ensures the customer is genuine and prevents fraudulent activity.
• https://www.rbi.org.in/commonman/English/scripts/notification.aspx?id=2607 (Master Direction - Know Your Customer (KYC) Direction, 2016)

Example:

A bank may request a passport, utility bill, and PAN card (in India) before opening an account or approving a loan.

2. Know Customer Integrity

• This evaluates the customer's history of honoring financial commitments, checking for red flags like defaulting on previous loans or involvement in fraudulent activities.
• Tools like credit scores and reference checks are often used.

Example:

A borrower with a credit score of 750+ who has never missed loan payments shows high integrity, while someone with frequent defaults signals risk.

3. Performance Efficiency

• For businesses, performance efficiency involves analyzing key metrics like turnover, profit margins, and operational efficiency.
• For individuals, factors like job stability and income consistency are considered.

Example:

A manufacturing business seeking a loan shows consistent growth in sales and reduced operating costs, indicating operational efficiency and ability to repay.

4. Know Financial Position and Ability to Pay Back Loan

• Detailed financial analysis includes reviewing income statements, cash flow, debt obligations, and savings.
• Lenders also consider the borrower’s debt-to-income (DTI) ratio.

Example:

A borrower with a monthly income of ?1,00,000 and existing loan EMIs of ?30,000 (DTI = 30%) is in a good financial position to take another loan.

5. Know About Industry of the Customer

• The industry’s growth potential, competitive pressures, and regulatory environment affect a borrower’s ability to succeed.
• Economic downturns in certain sectors can make repayment more challenging.

Example:

A bank may hesitate to lend to a startup in a declining industry, like print media, but might favor a renewable energy company due to its growth prospects.

6. Know Legal Sanctity of Securities

• Lenders verify the legal ownership and enforceability of collateral, ensuring it is free of encumbrances or disputes.
• This protects the lender’s interests if the borrower defaults.

Example:

A borrower offering a property as collateral must provide clear title deeds and a no-objection certificate (NOC) from relevant authorities.

7. Know Valuation of Securities

• The value of the security should sufficiently cover the loan amount. Independent appraisals are often conducted.
• Regular revaluation ensures the collateral remains adequate, especially in volatile markets.

Example:

For a ?50 lakh loan, a borrower offering a property worth ?1 crore as collateral provides a safe margin. However, if the property market crashes and the value drops to ?40 lakh, the lender is exposed to risk.