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Study of Borrowers

There are different approaches to assessing creditworthiness among economists and banks. For some, it refers to a borrower's ability to repay debts, while others see it as both ability and willingness. Banks evaluate both individuals and legal entities through financial and qualitative analysis. For legal entities, this includes assessing financial indicators, business reputation, and economic environment. For individuals, banks consider income level, credit history from credit bureaus, and standardized scoring models that use statistical analyses of past customer data to predict repayment likelihood. Creditworthiness assessment helps banks minimize credit risk and make lending decisions.

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Sana Khan
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130 views

Study of Borrowers

There are different approaches to assessing creditworthiness among economists and banks. For some, it refers to a borrower's ability to repay debts, while others see it as both ability and willingness. Banks evaluate both individuals and legal entities through financial and qualitative analysis. For legal entities, this includes assessing financial indicators, business reputation, and economic environment. For individuals, banks consider income level, credit history from credit bureaus, and standardized scoring models that use statistical analyses of past customer data to predict repayment likelihood. Creditworthiness assessment helps banks minimize credit risk and make lending decisions.

Uploaded by

Sana Khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Concept and assessment of the creditworthiness of the borrowers bank Among modern economists, so far there is no consensus on the

definition of credit. Some of them determine the creditworthiness of the borrower as the ability to fully and timely pay for its debt obligations. For others under the creditworthiness of the borrower should be understood not only the capacity (ie availability), but also the availability (presence of desire) the person promptly and fully repay their debts. The second approach is peculiar to western banking practices, which involves the assessment of creditworthy, that is how the customer worthy of credit. The study is carried out to assess the creditworthiness of potential borrowers to address the opportunities and conditions of lending. Credit rating is one way to prevent or minimize the credit risk associated with lending to customers. Assessment of the creditworthiness of borrowers legal entities In banking practice, there is no single standardized system for evaluating creditworthiness. Banks from different countries use different systems analysis of the creditworthiness of borrowers. The variety of approaches is determined by the varying degrees of confidence in the quantitative and qualitative methods of assessing the creditworthiness of factors, characteristics of individual cultures and historical lending practices of credit rating. Assessment of the creditworthiness of the borrower legal entity comprises two main phases: financial analysis (conducted on the basis of financial indicators) and qualitative (non-financial) analysis. Qualitative analysis of the creditworthiness of the borrower based on the use of information that can not be expressed in quantitative terms. At this stage the bank is studying the business reputation of a potential borrower (honesty, integrity, leadership skills, work experience in relevant industry, employee turnover, timely payment of previously received credits, etc.) and economic environment of the borrower (the main business partners, competitive products, the stability of markets marketing, etc.). For these purposes may use the information stored as the bank itself, as well as other banks, credit bureaus. Financial analysis is usually the final stage in evaluating the creditworthiness of the borrower and is to determine the number of indicators, which often include liquidity ratios, own funds ratio, indicators of financial sustainability of the client, as well as turnover and profitability. As a result of the calculation of these indicators bank concludes the class of the creditworthiness of potential borrowers, which, in turn, depends on the class of each

calculated parameter. Some difficulties in assigning a client to a particular class of credit arises in the case of a significant difference of the levels of actual values of the coefficients. Therefore, banks use ratings, which is based on the following principle: banks independently determine the range of the most important from their point of view of performance and assign them a certain weight (in points or percent). Later class borrower accepted banks into account when developing the scale of interest rates, conditions and lending treatment, assessing the quality of loans comprising the loan portfolio. Assessment of the creditworthiness of borrowers individuals For retail lending also performed a procedure to assess their creditworthiness, which can be carried out on the basis of income of the borrower, the study of his credit history, as well as standardized scoring assessment. Assessment of the creditworthiness of a borrowers income level is based on data on individual income and risk of loss of income. Revenue is determined on the basis of certificates of wages or income tax return, and then adjusted for mandatory payments and risk ratios of the bank. Credit history is how to obtain and meet the prospective borrower of loans in the past. With a view to the formation of credit histories in established and operated credit bureaus. Scoring is a mathematical or statistical model, with which, based on credit histories of other customers the bank is trying to determine how likely is it that a particular potential borrower returns the loan term. In the most simplified form, scoring model is a weighted sum of certain characteristics, thus forming an integral factor. This figure compares with a certain numerical threshold, which is essentially a line break-even point and is calculated from the ratio of the average number to customers who pay on time, in order to compensate for losses from a single debtor. Credit is given to those customers, an integral factor that above this line. Thus, the scoring does not answer the question why the borrower does not pay. He identifies those characteristics that are most closely associated with the unreliability, or, conversely, the reliability of clients of a certain age, a certain profession, education, the same number of dependents, etc. This is discriminatory Scoring: man, on formal grounds close to the group with a poor credit history will likely not be able to get credit.

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