In a normal layman terms, credit monetary analysis is the process in which potential for lending money by banks to a businessman is measured. As per RBI guidelines it is provided for three types of loans -
- working capital limits
- term loans
- project loans
The 5 C’s of credit monetary analysis -
Character -
It is the first step in which a lender analyses the general financial situation of the borrower. In it the qualitative information is collected about the borrower’s background, enquiries, community perceptions, market opinion surveys and many other trusted resources.
Capacity -
It is the most important step for analysis by the lender that how the money amount of the lender is going to take place from the borrower by the lender. For this the cash flow, payment history and time limits are decided by the lender.
Capital -
This is also one of the most important factor for analysis by the lender because it is a commitment to the business by the borrower. This determines that the borrower will have good personal financial assets to repay the loan.
Guarantee -
Guarantees are the legal documents, which are an assurance to the lender that if the borrower fails to repay the loan amount then who will repay the loan. It is a way to mitigate the default risk.
Conditions -
Conditions determine the purposes for which the loan is being taken. The purposes are many - lending machine, inventory, working capital, long term investments etc.
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