Assessing Creditworthiness of a Corporate Customer A Field Perspective
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Authors
Authors: Rajiv Fernando
Faculty Associate,
ICMR (IBS Center for Management Research).
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Credit Assessment at the Field Level Contd...
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An assessment of the integrity of the promoters and their management experience is an important aspect in the pre-sanction credit evaluation process. This is necessary especially in the case of new customers, who have not been dealing with the bank in the past. In these cases, a check with the RBI's willful defaulters list is a necessary prerequisite. The commitment level of the promoters to their business can also be assessed if the profits have been ploughed back into the business to build assets that will generate future cash flows for the business. As mentioned earlier, informal conversations with the client's existing bankers, industry peers will yield valuable information on these aspects. In assessing the integrity of the promoters, a banker should also try to avoid being influenced by perceptions, preconceptions or any outward appearances of the borrowers. For renewal of credit limits, it is important to maintain the overall credit exposure within the assessed working capital limits in order to limit the exposure risk. Some of the critical factors that are taken into account during renewal are some past performance issues like whether the interest and principal have been serviced on time, presence of any arrears or temporary overdrafts, timely submission of stock statements, quarterly results and annual reports. |
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Post-sanction Monitoring
Credit risk management at the ground level is a continuous process, and should not be confined to a pre-sanction activity. This is more relevant to ongoing business concerns and societies. In fact, post-sanction monitoring is a necessary part of the field officer's job profile. This comprises tracking the respective client's compliance to the sanction terms of the loan proposal. Creation of security mortgage; filing of forms 8 & 13 at the Registrar of Companies (ROC); insuring the assets that are being funded; submission of monthly stock statements, quarterly stock audits and conducting unit inspections all form a part of the post-sanction monitoring activity for the field officer. It is also very important for the customer relationship manager (or the loan officer) to visit the company's manufacturing unit or markets at regular intervals to keep abreast of any developments or potential pitfalls. This helps the officer to proactively spot any opportunities for cross-selling of products or be forewarned against any impending threats.
Conclusion
Credit risk management in banks has undergone a sea change from the earlier years when credit decisions used to be based on judgment and experience. Determining and mitigating credit risk has now become a complex process with a variety of credit scoring models at the analyst's disposal. Though subjective judgments are generally looked down upon, it is important for a bank to devise a proper system, where objective credit risk assessment procedures are combined with the collective experience of their seasoned bankers at the top management and also those working at the field level. A prudent loan officer will use a mix of hard (quantitative) and soft (qualitative) factors to assess the creditworthiness of the customer and collect the necessary information that can be used to determine the credit rating of the client as per the banks policy. Credit risk assessment is also not a one-time activity, but an ongoing part of the relationship with the customer.