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Credit Appraisal means an investigation done by the financial institution before granting loan or advances to the fund seeker.

Process of Credit Appraisal

  • Request from client
  • Document Collection & Scrutiny
  • Appraisal
  • Approval

Credit Appraisal

  • Action Against Defaulters
  • Monitoring
  • Disbursement

Step Wise Credibility Check

  • Filling of application form with KYC and financial documents.
  • Process of verification and reconciliation of documents.
  • Financial Institution provides a rating to the applicant based on the above document scrutiny.
  • Applicant agrees to the terms and conditions, then financial institution approve the loan.
  • Loan amount gets deposited in the applicant’s account.
  • Post sanction activities such as receiving stock statements, review of accounts.
  • Recovery procedures are initiated in case of default in repayment.

Parameters in Credit Appraisal

• Financial Parameter

  • Past Track record
  • Performance Indicators
  • Financial Indicators
  • Collateral Security
  • Financial Ratios

Industry Parameter

  • Competition
  • Industry Outlook
  • Regulatory Risk
  • Collateral Security
  • CIBIL Score or rating from different credit rating companies

Management Parameters

  • Corporate governance
  • Corporate Social Responsibility
  • Management Competence
  • Expertise
  • Strategic Initiatives

The credit process begins with a thorough analysis of the borrower’s creditworthiness, or capacity and willingness to repay the loan. Following shall be considered:

  • The borrower’s current and expected financial condition.
  • The borrower’s ability to withstand adverse conditions or “stress.”
  • The borrower’s credit history and a positive correlation between historical and projected repayment capacity.
  • The optimal loan structure, including loan amortization, covenants, reporting requirements – the underwriting elements.
  • Collateral pledged by the borrower – amount, quality and liquidity; bank ability to realize the collateral under the worst case scenario. And,
  • Qualitative factors, such as management, the industry and the state of the economy.

This process begins with the collection, analysis and evaluation of information required to determine the creditworthiness of the borrower seeking credit. After the credit analysis is completed and borrower has been determined to be an acceptable risk, the credit officer proposes a loan structure for approval that preserves the strengths and protects against identified weaknesses of the borrower. The process ends with determination of a risk rating for the credit and loan approval (or rejection). The financial institution’s credit policy, lending standards and procedures create the parameters for this process, thereby establishing the appetite for risk.

Analysis of risks associated with any borrower should focus on the four foundations of creditworthiness, shown below:


It involves the industry dynamics and the company’s position within the industry. Weakness in the industry itself can significantly impact loan repayment ability and the company’s position within the industry is an important issue.

Financial Condition

It focuses on the borrower’s ability to generate sufficient cash, the first source of loan repayment, or to draw on existing resources, e.g., capital or assets, to repay borrowings. The credit analyst examines the income statement, the balance sheet and the cash flow statement to evaluate this foundation of creditworthiness, focusing on profitability, efficiency, liquidity, and leverage, in particular.

Management Quality

It entails the competence, integrity and alliances of the key individuals running the company. Management weakness or dishonesty can have an impact on both repayment capacity and security realization. Depth of management is always a concern, especially in smaller, family run organizations.

Security Realization

It determines the level of the financial institutions’ control over collateral and the likely liquidation value, factoring in time, i.e., net present value. Weakness in security realization threatens the second source of loan repayment.