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.
The Neglected Dimension of Risk
Borrower assessment is often a neglected area in retail and commercial banking. Prospective borrowers are often sourced by accident or reputation, while their true constitution, character, and track-record are lost sight of.
Delinquent cases often slip into the system unnannounced, sometimes accompanied by professionals paid to fill gaps in the proposal or counter anticipated embarrassing questions. We must marshal our experience to guard against unscrupulous borrowers slipping into the banking system.
Customer Interview Technique
Assessing subjective factors requires a high level of expertise. Every Credit Manager needs a systematic approach to character characteristics:
Motivation
What induced the customer to put forth the proposition?
Integrity
Determination, adaptability, enthusiasm, and honesty.
Age & Experience
Assessing risk of sickness/death vs. venture-specific competence.
Special Abilities
Whether the borrower possesses the specific skills required by the proposal.
Leadership
Abilities of control, coordination of functions, and delegation.
Managerial Depth
Expertise in marketing, finance, and production management.
Circumstances
Backing from family/private means vs. health or financial problems.
Dialogue Mastery
The skill to elicit information beyond a simple series of questions.
Setting the Professional Scene
The Partner Reception
The customer must be treated with friendly respect as a potential partner discussing a matter of mutual interest. Avoid direct disagreement whenever possible.
The Analyst's Shoes
Put yourself in the customer's shoes to make a professional analysis. Highlighting experience/abilities directly, while analyzing character more subtly.
The Art of 'No'
Learn to say 'No' without antagonism. A well-managed interview may lead the customer to re-think or postpone the project voluntarily.
Case Study: The Road Contractor
The Highway Contractor Carrot (Madras Project)
The Scenario: A proposal for Rs. 250 lacs each for Performance, Deferred, and Advance Payment Guarantees. Branch was carried away by a Rs. 50 lac deposit offer, unmindful of the missing borrower assessment.
The True Facts (Post-Mortem Disclosures)
Unknown Origin
The Punjab-based borrower was entirely unknown to the local Madras environment.
Failed Collaborator
Reports on the Italian collaborator revealed heavy losses and inability to carry on business elsewhere.
Criminal Scandal
Borrower was connected with a major scandal; all account books were confiscated by investigating agencies.
Existing Litigant
A nationalised bank had already filed a Rs. 1.5 Crore suit on the borrower.
Mismatch of Funds
While contract was for 18 months, DPG was for 5 years. Fate of machinery and repayment source were never indicated.
The Fake Report
The credit report was issued by an "Official Language Cell"—entirely fake upon cross-verification.
Firmness saved the bank from massive bad debt. Political pressure and accusations of "delay" were ignored in favor of core credit integrity. The borrower is currently reported missing.
Technique of Dialogue in Appraisal
Dialogue is a purposeful tool, not an aimless hike. The success depends on the skill of the interviewer to deduce human attributes through logical processes.
The Five Fundamental Questions
- 1. Who is the borrower? What skill, character, and ability?
- 2. How much is needed? And exactly why is it needed?
- 3. What is the purpose? And how will the funds be deployed?
- 4. How long? What are the reasonable chances of repayment?
- 5. What security? Available backup in case of project failure.
Verifying Viability: Real-World Tests
The Play Writer
Assessing the undoubted skill to perform the service and the existence of a market for staging the play.
The Camel Driver
Assistance for transport of vegetables depends on expertise in the environment and certainty of return flow.
Assessment Summary
A successful credit decision balances rigid financial analysis with fluid human assessment. No other technique gives as much info as a properly conducted dialogue.
Key Credit Vectors
- Verified Skills & Background
- Logic of Fund Requirement
- Determinant of Viability
- Certainty of Return Flow
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