Credit appraisal system at Standard Chartered Bank and the SME credit department

The ongoing development of contemporary risk management methods and the increased use of innovative financial products such as securitization and credit derivatives have brought about substantial changes in the business environment faced by credit institutions today. Especially in the field of lending, these changes and innovations are now forcing banks to adapt their in-house software systems and the relevant business processes to meet these new requirements. Every banking corporation faces various kinds of risks during the course of its activities. Any profit - maximizing business, including banks, must deal with macroeconomic risks, such as the effects of inflation or recession and micro economic risks like new competitive threats. Risk management involves spotting the key risks, deciding where risk exposure should be increased or reduced, and identifying the methods for monitoring and managing the bank’s risk position in real time. Credit risk, the risk that a borrower defaults on a bank loan, is the risk usually associated with banks, because of the lending side of the intermediary function. It continues to be central to good risk management because most bank failures are linked to a high ratio of non performing loans to total loans. Good credit risk management has always been a key component to the success of the bank, even as banks move into other areas. Managing credit risk is the “bread and butter” of most commercial banks. There are examples of major bank failures which demonstrate that no matter what the structure of the banking system, poor risk management can cause insolvency, which may be endemic in a particular country.

[...] A credit history with no adverse entries allows the borrower a fairly free hand at the choice of lender and product available from the entire lending community. Lenders call these applicants ‘clean’ and are the most desired borrower type. If a borrower has good income, significant assets, low debt levels and a ‘clean’ credit history, then this credit ‘profile’ is the most preferred borrower type and implies a low risk of any future default or loss for the lender. It doesn’t guarantee it, but it looks good. [...]

[...] Standard Chartered has developed a tool called CET (credit evaluation tool) which provides a systematic procedure for analyzing and quantifying the potential credit risk. It includes balance sheet, income statement, cash flow statement and ratios for the purpose of financial statement analysis. This spreadsheet provides a quick method of assessing business trend & efficiency and helps to assess the borrower ability to pay the loan Obligation. After the financial information is entered the credit score is evaluated which reflects the percentage of risk associated with the applicant. [...]

[...] CUSTOMER APPRAISAL It’s a process through which credit unit arrives at the credit decision gauging the ability and intention of the borrower. Borrower appraisal Management appraisal Financial appraisal Borrower appraisal: Every credit proposal, however small or big, originates from an individual, group of individuals or a body run by individuals. It is therefore important to ascertain the credit worthiness of the people behind the show. Confidence is the basis of all credit transactions. Thus, if the bank officer has no confidence in the honesty, willingness and ability of the borrower to repay the loans at maturity or when called upon to repay, he should never consider granting the loan. [...]