Evaluation Of Credit Worthiness

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Assessment of credit worthiness of a customer is a subjective matter and lot depends upon the experience and judgement  of the person taking the decisions.
It is a two step procedure

i)    Collection of information
ii)    Analysis of information

Collection of information:

The firm may collect information from various sources on the prospective credit customers. The following are sources of information which can provide sufficient data or information about the credit worthiness of  a customer:

i) Bank reference :
Though the bank may be reluctant to give  financial information of its customer, yet may be asked to comment on the financial position of a particular customer.

ii) Credit regency report:
There are several credit rating agencies which provide independent information on the credit worthiness of different parties. These agencies gather information on the credit history of different businessmen & sell it to the firm who want to extend the credit.

iii) Published information:
The published financial statement of the customers for few preceding years may also be taken as a source of information , as they contain lot f details regarding the operation.

iv) Credit scoring: 
In this case , the customer may b evaluated  through the use of  credit scoring which involves the numerical evaluation to a simple set of questions. The score is then evaluated according to a pre-determined standard. The major benefit of credit scoring is that  it is relatively inexpensive & less time consuming.

Analysis of information:  

All the collected information must be analyzed  to reach some conclusion regarding the credit worthiness of a customer. The five well known C’s of credit : Character, Capacity ,Capital ,Collateral & Conditions provide a frame work for the evaluation of a  customer. These characteristics can throw  light on the credit worthiness or default risk of the customer. Where a customer’s credit standing is either favorable or far below the pre-established credit standards, the selection or rejection of a customer is an easy job. Step by step analysis of information may be made & assessment should be made at various point  to ascertain whether further analysis is required or not.

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