Question

Explain what is meant by credit appraisal? How does credit appraisal for businesses differ from retail clients?

Answer 1

Credit appraisal is the process of estimating the credit worthiness of a borrower.

To assess the creditworthiness, the income of the borrower, repayment track record of the borrower, net worth of the borrower etc are to be ascertained and evaluated. It is to find out whether the borrower is capable of servicing the loan and also his commitment towards meeting obligations.

Credit appraisal of retail clients is rather simpler than appraisal of business. It is less risky.

For retail clients, the age of the person, his income, his assets, his existing loans and their repayment schedules are the required details, which details are obtainable without much difficulty.

But for businesses, the credit appraisal should cover, the prospects of the business, the risks involved in the business, the competitors, etc. A detailed analysis of the financial statements of the business for a few past years would also be required to know the intent of the owners in honouring their obligations towards suppliers, taxes, other lenders, etc.

The audit reports would also have to be studied as they would highlight any deviations from ethical accounting practices.

Thus, credit appraisal of businesses is a more thorough and demanding exercise than credit appraisal of retail borrowers.