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Assessment of The Borrower
The heart of credit risk lies not just in the numbers, but in the character and capability of the individual behind them.
Insight: Prospective borrowers are often sourced by accident or reputation. A rigorous assessment of character, track record, and dealings is vital to prevent future delinquency.
Professionals are often hired to fill gaps or counter embarrassing questions. Credit officers must navigate through well-rehearsed presentations to discover the truth. Many failed cases highlight that common sense assessment at the first instance could have prevented significant losses.
1. Customer Interview Technique
Assessment requires high-level financial knowledge and expertise in subjective factors. Customer characteristics to examine include:
1. Motivation
What induced the customer to put forth the proposition?
2. Character & Integrity
Qualities of determination, adaptability, enthusiasm, and honesty.
3. Age
Considerations regarding business continuity and succession.
4. Experience
Relevant experience in the particular venture.
5. Special Abilities
Specific skills required by the proposition.
6. Leadership
Abilities of control, coordination, and delegation.
Key Interview Factors
- The Credit Manager's personality influences the customer interaction.
- Reception should be professional and respectful as a potential partner.
- Avoid direct disagreement; remain supportive while maintaining finality.
- Analyze experience and ability directly, but character and motivation more subtly.
- Learn to say 'No' without antagonism.
2. Assessment Case Study: The Road Contractor
The Proposal
A request for performance and Advance Payment Guarantees (Rs. 250 lacs each) for a highway project near Madras. The branch felt urgency due to a 15-day deadline and an attractive deposit of Rs. 50 lacs.
Missing Elements
- Borrower background assessment
- Credit assessment and risk factors
- Verification of means and standing
Post-Mortem Reality Check
- Collaborator had heavy losses.
- Borrower was involved in a major scandal.
- A suit for Rs. 1.5 crores was already filed by another bank.
- Credit report provided was fake.
3. The Technique of Dialogue in Credit Appraisal
Dialogue is a purposeful tool to extract facts and deduce human attributes through a logical process. The interviewer must have a clear objective.
Who?
Skills, character, ability, and personal assessment.
How Much?
Exact requirement and true purpose of the funds.
Repayment?
Duration of need and reasonable chances of recovery.
Fundamental Checklist
1. Entrepreneur's Viability
Has the borrower tested the viability? Are they competent for the task?
2. Skills and Background
Verify home background, schooling, and life starts as these are indicators of future behavior.
3. Viability and Market
Viability must be judged in the context of certain return flow (liquidity).