What are the purposes of credit investigation?
Purposes of Credit Investigation
Credit investigation serves several important purposes. It helps the bank make safe and informed lending decisions. The main purposes are as follows:
Confirming the Borrower’s Character
Credit investigation verifies the borrower’s integrity, reputation, and willingness to repay. It helps the bank assess the borrower’s character, which is the most important dimension of creditworthiness.
Assessing Repayment Capacity
It evaluates the borrower’s cash flow, income, and financial strength. The investigation confirms whether the borrower can repay the loan according to the proposed repayment schedule.
Verifying Business Viability
Credit investigation examines the purpose of the loan. It ensures that the proposed business or project is commercially viable and economically sound.
Identifying Risks Early
The investigation identifies potential risks before loan approval. These include business risk, financial risk, market risk, management risk, and environmental risk.
Preventing Bad Loans
A thorough investigation helps the bank avoid lending to unviable or dishonest borrowers. As a result, it reduces the risk of Non-Performing Loans (NPLs).
Structuring the Right Loan
The information collected during the investigation helps the bank design a suitable credit facility. It assists in determining the appropriate loan amount, tenor, repayment schedule, and security.
Setting Loan Covenants and Conditions
Credit investigation helps the bank determine suitable loan conditions. These may include financial ratio requirements, insurance coverage, reporting obligations, and restrictions on the use of loan funds.
Supporting ICRRS Completion
The investigation provides both qualitative and quantitative information. This information is used to complete the Integrated Credit Risk Rating System (ICRRS). The ICRRS determines the borrower’s overall credit grade.
Protecting Depositors’ Funds
Ultimately, credit investigation protects the money deposited by customers. It ensures that the bank lends only to creditworthy borrowers with viable business prospects.
Credit Operations & Management, Module: B, 98th Exam Q7(a)
