What is credit investigation? Discuss the 6Cs that a banker should consider during credit investigation

Credit investigation refers to the process of carefully examining and assessing a credit proposal and related information from different dimensions. It helps the banker to build confidence in the borrower’s ability and willingness to repay.

Credit investigation is a preventive measure. It is always better to prevent a bad loan than to recover it after disbursement. Curative measures (recovery) are always costlier than preventive measures in terms of both time and money.

The 6Cs of Credit Investigation

Before allowing credit, a banker must satisfy himself that the applicant qualifies under the following six essentials — known as the 6Cs:

Character: Character means the borrower’s integrity, honesty, and intention to repay. The credit officer examines the borrower’s credit record, dependability, commitment, and reputation. Character is the most important C. Without it, no credit should be given.

Capacity: Capacity means the borrower’s ability to repay the loan. The banker assesses the customer’s identity, legal structure, nature of operations, business ability, experience, and technical knowledge. For a business borrower, the officer also considers products, key customers, and suppliers.

Capital: Capital refers to the borrower’s financial strength. It covers the borrower’s stake in the business, solvency, retained earnings, ability to inject more funds, and net worth. For a retail borrower, take-home pay and turnover of payables, receivables, and inventory are considered.

Condition: Condition refers to the overall economic climate — both in the borrower’s industry and the broader economy. The banker assesses the borrower’s performance compared to peers, the competitive environment, economic trends, industry growth, and regulatory conditions.

Collateral: Collateral means the borrower’s ability to provide security. The banker assesses ownership of assets, asset quality, type and location, title and encumbrances, insurance coverage, forced sale value, and any third-party guarantees.

Cash Flow: Cash flow is the ultimate source of loan repayment. The banker appraises the borrower’s cash-generating ability by analyzing operating, investing, and financing activities. A business with strong, consistent cash flow is a safer credit risk.

Credit Operations & Management, Module: B, 5th Exam Q3(a) & Q3(b), 98th Exam Q2(c)