Paisa wapas aana Chahiye !
Balancing Act — How much to fund is not only about Calculation, it also depends how much he can pay us back in worst of the situation –
A human being is always hopeful of getting more and more!!!! A prospective client needs more credit to ease of their problems, a sales person needs high ticket size sanctions to accomplish their targets, an underwriter gathers around his/her experience to analyse how much is appropriate funding, how risks are factored and mitigated through credit enhancements techniques like guarantees, Securities etc. and most importantly it gets concentrated around basic principle of 5 C’s in evaluating whether money lent will come back or not.
There is always a tussle b/w sales and credit in lending sector with one claiming client should have been offered more credit while u/w claiming its not safe to lend more , @End of day its all about applying all possible insights , factors , judgement , discussions , micro and macro factors ,information to judge the overall effect on present and future financial health of a prospective client and “kitna dena sahi hoga ki wapas aa jaye” .
It’s always not about calculating eligibility of maximum permissible finance as per laid down policy , its a guideline towards Quantitative and Qualitative assessment . A customer who has 1–2 clients as end customers doing enormous amounts of business with them carries high concentrating anchor risk & if promoters are from less wealthy background , they can’t pay to us in their worst times and we can’t judge time, we can only make assumptions. In this going concern situation, if business drops /fails, anchor shifts, there is minimal chance of recovery. The other side of story involves when client is not eligible for requested amount of loan but there are several factors supporting him for a better and requested loan eligibility, there is always a chance of judging them for higher loan offering than calculated eligibility as we feel through his track record ,financial growth, market information and promoters background cum net worth that if even we offer higher loan, there is maximum chance of recovery and mera paisa wapas aa jayega .
Be it sales or credit , Collective effort should be there in judging how best we can recover our money in worst of situation.
The “Five Cs” of Credit Analysis
Capacity to repay is the most critical of the five factors. As a lender , We want to know exactly how Client intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history of existing credit relationships — personal or commercial — is considered an indicator of future payment performance. Also, we will want to know about Clients contingent sources of repayment.
Capital is the money which prospective borrower has personally invested in the business and is an indication of how much you have at risk should the business fail. As a lender we expect prospective borrowers to have contributed from his own assets and taken on personal financial risk to establish the business before asking lender to commit any funding.
Collateral or guarantees are additional forms of security which borrower can provide to the lender. For a underwriter or a sales person , it is all about lowering down the risk of the lending company Collateral means that borrowers pledge an asset owned by them , that it will be the repayment source in case borrower can’t repay the loan and we get our money back . A guarantee, on the other hand, is just that — someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.
Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender also will consider the local economic climate and conditions both within industry and in other industries that could affect borrowers business.
Character is the general impression which customer make on the potential lender. The lender will form a subjective opinion as to whether Client is sufficiently trustworthy to repay the loan or generate a return on funds lent to the borrower. Experience in business in the industry will be reviewed. The quality of borrower references and the background.
Originally published at www.ofbusiness.com.