Credit Analysis Ratios For Banks

Credit analysis ratios for banks

When an individual or business entity applies for access to credit, there are numerous factors that are taken into account before a loan can be granted. Even through trust is important, the unfortunate reality of the world in which we live is that there are scammers who are often looking for easy ways to steal from others. This is one of the reasons it has become so important to do due diligence when doing business.

Banks often have their own ways of helping their clients, such as by offering lines of credit.

Not all applicants are approved for credit, mainly due to the stringent qualification processes involved. Even though offering credit is a simple way for banks to earn interest, deciding who can get this credit isn’t so easy. There are factors that come into play, such as creditworthiness and affordability. Vital questions to ask include:

How much income does the applicant have?
How much debt do they already have?
Will they afford to make repayments comfortably?
Do they pay on time?

These are all questions that are asked by banks before they grant any credit. There are also credit analysis ratios that can be used as part of a credit analysis process.

Analysts use ratios in order to paint an exact picture of a business’ financials. Most banks have their own credit rating mechanism. This is highly useful for placing borrowers into certain risk categories and makes it easy to judge the borrower.

More about credit analysis ratios for banks:

These ratios are a form of quantitative analysis of information that is contained in a company’s financial statements.

Liquidity ratios
This ratio indicates the ability of a company to repay its creditors and expenses.

Solvency ratios
This is used in order to judge the risk involved in the business.

Profitability ratios
This shows the ability of a company to earn satisfactory profit over a period of time.

Cash flow and projected cash flow analysis ratios
This helps to get a true picture about the movement of money in and out of the business.