BANKING DECISION-MAKING IN CREDIT APPROVAL
In credit granting, banking decisions are based on various factors that affect the borrower’s creditworthiness and the associated credit risk. Here is a more detailed explanation along with examples for each basis of banking decision-making in credit granting:
Financial Feasibility Analysis
Banks evaluate the borrower’s financial feasibility, including income, assets, and liabilities, to determine the borrower’s ability to repay the loan. For example, a borrower with stable income, sufficient assets, and well-managed liabilities is likely to be considered more eligible for receiving credit. For instance, an entrepreneur with a strong financial record and stable cash flow may be considered eligible for obtaining a business loan.
Credit History
Banks examine the borrower’s credit history, including previous payment records, late payments, and existing debt. A borrower with a good credit history, without any records of late payments, is likely to be considered more eligible for receiving credit. For example, an individual consistently paying credit card bills on time and having a clean credit record will have a good credit history.
Intended Use of Funds
Banks understand the purpose of the loan to assess whether the use of funds can support growth or productive activities. For example, the use of funds for investment in a business with good growth prospects is likely to support credit granting. For instance, an entrepreneur applying for a loan to expand operations and increase production capacity may be considered to have a productive use of funds.
Collateral
Banks consider collateral or assets that can be used as security for the loan, which can reduce the lender’s risk. For example, a borrower offering valuable assets such as property or investments is likely to have a greater chance of loan approval. For instance, an entrepreneur offering business assets as collateral for a working capital loan.
Sector and Industry Risks
Banks take into account the risks associated with the sector or industry in which the borrower works or operates. For example, a stable sector or industry with good growth prospects is likely to support credit granting. For instance, a borrower operating in a rapidly growing technology sector may be considered to have lower risks.
Economic Conditions
Banks consider the current economic conditions and future economic projections that may affect the borrower’s ability to repay the loan. For example, in stable economic conditions and positive economic growth projections, borrowers may have a better chance of repaying the loan.
Regulatory Policies
Banks ensure that credit granting complies with applicable banking regulations and policies. This includes ensuring that the credit granting process aligns with legal requirements and banking regulations.
Risk Analysis
Banks assess credit risks associated with the borrower, including credit risk, market risk, and liquidity risk. For example, the bank will consider the possibility of default risk, market fluctuations, and the borrower’s liquidity in assessing credit risk.
Borrower’s Character
Banks examine the borrower’s character, including reputation, integrity, and the ability to meet financial obligations. For example, a borrower with a good reputation in the business community and high integrity is likely to be considered more eligible for receiving credit.
Cash Flow Analysis
Banks evaluate the borrower’s cash flow to ensure that the borrower has the ability to repay the loan. For example, the bank will examine the borrower’s business cash flow to ensure that the borrower has adequate income sources to repay the loan.
By considering these factors, banks can make more informed credit granting decisions and minimize credit risk. This also helps banks ensure that credit granting supports economic growth and productive business activities.
