Before jumping over to who is a credit analyst and what are their roles and responsibilities let’s put things in context and understand the basics of the credit analysis process starting with credit risk.
What is Credit Risk?
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Credit risk can be simply defined as the risk of default on the debt amount when the borrowers fail to make the required payments as per the contract. The loss accounted could be partial or complete leading to disruptions in cash flow for the lender and increased cost of collecting the loan amount.
In an efficient market, the cost of borrowing varies with the degree of credit risk associated based on the borrower’s profile. A credit check is usually performed by the lender before advancing any credit to the borrower; the credit assessment is based on various parameters that can help determine the repaying capacity of the borrower.
The process of credit analysis
For any lending institution, it is important to evaluate the credit risk profile of the borrower to minimize and cut down on its losses. The process of credit analysis helps in assessing an applicant’s credit request or debt issue from companies to establish the credit risk associated with them. It is a method that aids in evaluating the creditworthiness of an individual or a corporation.
On the technical side of it, the credit analysis process includes applying various financial analysis techniques, creating future projections and evaluating future cash flows. It also involves judging the candidate on multiple aspects such as credit history, collateral provided ability to manage the loan amount, other sources of repayment, etc. The probability of default on the debt and extent of loss in case of default is also calculated by analysts to depict a holistic picture.
Credit Analyst Roles and Responsibilities
Now that we are familiar with the credit analysis process let’s see what does a credit analyst does? To put things in context here, a credit risk analyst is a person responsible for carrying out the whole credit analysis process.
From a broader perspective, the role of a credit risk analyst involves reviewing and assessing the financial history of a person or corporation to determine if they are a good fit for the desired borrower profile. The job of an analyst here is to determine the risk of default to the lending party.
It’s not always black and white while determining the credit risk profile, there is a big grey area in most of the cases. A credit risk analyst can’t simply say yes or no to a loan application. After their comprehensive assessment, the loan is structured depending upon the creditworthiness of the borrower, a risky borrower could be given a loan at a higher interest rate.
The credit analysis process involves a series of steps to be carried out by the analysts to present a holistic picture. The first step deals with relevant information gathering; this includes collecting relevant personal information about the applicant, gathering information about the business for which loan is required and information regarding the source of repayment and the collateral pledged to the lending party.
The second stage of the analysis process deals with analysing the information collected. This includes analysing the accuracy of the information gathered, the financial stability of the borrower, the effectiveness of the project/business, the possibility of repayment of the loan amount.
The final stage deals with the decision making step by the analysts based on the credit risk associated with the applicant, if the credit risk is in the acceptable range then the loans are granted, if not, the request for a loan is denied by the credit analyst.