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Credit Principles and Appraisal Guide

The document outlines key credit principles, including safety, liquidity, profitability, purpose, diversification, and security, which guide lending decisions. It details the credit appraisal process, focusing on assessing borrower creditworthiness through financial analysis, business evaluation, management assessment, and risk grading. Tools such as financial ratios, site visits, CIB reports, and credit scoring models are employed to determine the outcome of credit proposals.

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11 views2 pages

Credit Principles and Appraisal Guide

The document outlines key credit principles, including safety, liquidity, profitability, purpose, diversification, and security, which guide lending decisions. It details the credit appraisal process, focusing on assessing borrower creditworthiness through financial analysis, business evaluation, management assessment, and risk grading. Tools such as financial ratios, site visits, CIB reports, and credit scoring models are employed to determine the outcome of credit proposals.

Uploaded by

liyaahmed332
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© All Rights Reserved
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

Module B 2.

3: Credit Principles and


Credit Appraisal
1. Credit Principles
 a) Safety – Ensuring the borrower has the ability and willingness to repay. Primary
concern is repayment of the loan with interest.
 b) Liquidity – Loan must be recoverable when needed. Short-term and working capital
loans emphasize liquidity.
 c) Profitability – Loans should yield sufficient return for the bank. Interest income is the
main source of profitability.
 d) Purpose – Credit must be for a legitimate and productive purpose. Avoid speculative
or illegal purposes.
 e) Diversification – Avoid concentration risk. Spread loans across sectors, industries,
and borrower types.
 f) Security – Adequate collateral to protect the bank. Not a substitute for repayment
capacity.

2. Credit Appraisal
Credit appraisal is the process of evaluating the borrower before sanctioning the loan.

a) Objectives:
 Assess creditworthiness
 Ensure repayment ability
 Minimize default risk

b) Key Elements:
 Financial Analysis – Examining balance sheet, income statement, cash flow.
 Business Analysis – Industry outlook, market position, SWOT analysis.
 Management Evaluation – Experience, reputation, decision-making.
 Risk Grading – Assigning a credit score based on various factors.

3. Tools Used in Appraisal


 Financial Ratios: Current ratio, debt-equity ratio, profitability ratios.
 Site Visits: Physical inspection of operations/assets.
 CIB Report: Central bank information on existing liabilities.
 Credit Scoring Models: Automated or manual systems for risk assessment.
4. Outcome of Credit Appraisal
 Decision to approve, modify, or reject a credit proposal.
 Proper documentation for audit and compliance.

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