Question

List and explain the 5 C's of credit.

Answer 1

5 C's of credit are as follows-

A. Capital- capital will be one of the elements which will be looked into, because how much capital the borrower had its self invested into the business will be looked into in order to determine the level of the risk of the borrower.

B. Capacity- the capacity of the borrower in order to discharge the debt should also be determined and the capacity of the borrower will be determined through the books of accounts and other past performances history in relation to discharging of debt.

C. Condition- condition will be related to the current economic situation which will be assessed in advance and other macro economic factors along with the future economic cycle so that the conditions related to business should be assessed in advance.

D. Collateral - collateral will be representing the capacity of the borrower to put his assets as security with the lender. lender will always be looking for the collateral in order to secure himself in case the borrower is not able to repay the loan.

E. Character- character is the most important element of determination of the creditworthiness because it will be representing the integrity and the creditworthiness along with the past performance of the individual and a willingness to repay the loan