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Whenever you discuss personal loans or read about loans in general, you may have come across the term ‘credit appraisal’. Credit appraisal basically refers to assessing a particular loan application or proposal in a thorough manner in order to gauge the repayment ability of the loan applicant. A lender conducts a credit appraisal chiefly to make certain that the bank gets back the money that it lends to its customers.
Whether one applies individually or as a corporate entity, a lender always conducts a detailed and systematic credit appraisal process. The credit appraisal process before giving a loan to entities is comprehensive in nature as it appraises or evaluates management, market, technical, and financial elements.
No lender approves and sanctions anybody’s personal loan application instantly without an evaluation. It is absolutely important for a lender to carry out a credit appraisal process in order to ensure that the borrower has the capacity to repay the entire loan amount on time without missing any payment deadlines. This is very crucial for a bank as this determines the interest income and the capital of the bank. The repayment behaviour of a borrower directly affects the performance of the bank.
Both banks and non-banking financial corporations (NBFCs) utilise credit appraisal procedures before approving a personal loan application or any other loan application. Each lender will have its own techniques for performing credit appraisal processes. A lender will have certain norms, rules, and standards to assess the creditworthiness of a particular loan applicant. If a borrower has a high creditworthiness, there is high probability that his or her loan application will be accepted by the bank. A credit appraisal is done to avoid the risk of default on loans.
Factors Evaluated During a Credit Appraisal Process
A lender’s credit appraisal process will typically check and evaluate the following important factors:
Income
Age
Repayment ability
Work experience
Present and former loans
Nature of employment
Other monthly expenses
Future liabilities
Previous loan records
Tax history
Financing pattern
Assets owned
Credit Appraisal for Project Financing for Organisations
If a lender is approached by a company for project financing or a loan, then the lender will need to consider financial, technical, commercial, market, and managerial aspects of the organisation.
Under credit appraisal, to evaluate financial aspects, the bank will have to check the organisation’s costs, expenses, and estimated revenues in order to understand if the company will be able to repay the loan without any trouble.
To assess technical aspects of a company, the bank will have to evaluate the nature of the business and the industry or sector of the borrower. The lender will have to observe the company’s raw materials, capital, labour, transportation, selling plans, etc.
To evaluate the market of the borrower, the bank will have to evaluate its demand and supply. If the demand-supply gap is high, then it is great news for the lender. This is because it indicates that the company will enjoy good sales and hence, can repay the loan efficiently.
The bank also needs to assess the managerial aspects of an organisation before giving a loan to them. The bank should understand the goals, plans, and commitment of the company to the particular project. The organisation’s management style and ways of handling subordinates should be observed by the lender.
Banks will assess both financial and non-financial aspects in order to determine the borrower’s creditworthiness while conducting the credit appraisal process.
The intensity of the credit appraisal will depend on the loan quantum and the purpose of the loan. According to these aspects, the appraisal process can be simple or complex for both individuals and entities.
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