The Five C's of Credit

A credit officer should keep the lending principles in mind when judging a credit application. At the very initial stage the question / primary consideration that must be dealt with before any other is whether or not the customer can pay the loan. For this the bank has to consider some facts.

The Five C's of Credit

Character: In commercial lending, character refers to the client's willingness and determination to meet a loan obligation. Character is probably the single most important component of a client's make up. Business people of good character will make every effort to repay a loan and will work openly and cooperatively with their banker if their business experiences financial difficulties. Conversely persons lacking in character assign a low priority to repaying debts and are quick to renege on any loan commitment at the first sign of financial trouble.

Capacity: Loans are repaid from the cash generated during a company's operating cycle. Management's ability to generate enough cash to satisfy all obligations is defined as capacity. Capacity also refers to the ability to manage cash. Although a company may generate cash to pay its debts, it may use it for other purpose such as purchasing fixed assets rather than paying off the debt.

Capital: Capital refers to the funds available to operate a business, of which there are two primary considerations: the amount of equity capital the owners have invested in the business and how effectively the total capital in the business is employed.

Conditions: This term refers to external variables such as the state of the economy and the type of industry in which the client's is a part.

Collateral: Collateral is an important part of the five C's because it can be pledged by a borrower as a way of offsetting weaknesses in the other C's.

Modern Thinking to Assess Credit Worthiness of the Borrower:

Everything changes with the pace of time. Such that in this era people or the bank or the new banker consider six C's in case of credit assessment, which are:

1. Character 4. Collateral

2. Capacity 5. Conditions

3. Cash 6. Control

Techniques for Conducting an Interview of Prospective Borrower

A bank should be very careful in terms of conducting an interview of the prospective borrowers

A bank considers many things in terms of providing loan or credit for the safety of the loan and to make it easier for credit monitoring. The procedure that has been followed by Mercantile Bank Limited for credit appraisal as well making secured the loan and making easy of the process of credit monitoring are given below:

1) Particulars of the

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