Have you ever heard of the term credit analysis? This term is often used in the world of banking and finance, especially when you want to apply for a loan or credit.
However, do you know what real credit analysis is, starting from its definition, function, principles, and who is responsible for doing it? So that you don't misunderstand about the meaning of this one, let's discuss it in full in the following article.
1. Definition of Credit Analysis
Credit analysis is a complete credit assessment activity, covering both financial and non-financial aspects. Lukman Dendawijaya, who is an economist, explains that credit analysis is a process of checking credit using financial ratios and certain approaches to determining the credit needs of prospective borrowers.
Credit analysis is deliberately carried out to evaluate the ability of prospective debtors to pay back loans in a timely manner and without causing default risk or bad credit risk for non-bank financial institutions, banks, and finance companies.
1.1 Definition of Credit Analysis According to Experts
Quoted from various existing sources, the following are some definitions of credit analysis according to experts:
- According to the Financial Services Authority (OJK), credit analysis is a process that at least includes an assessment of the character, capacity, capital, collateral and business prospects of the debtor (condition of economy).
- According to Thomas Suyatno et al (2003: 70), the notion of credit analysis is work that includes: checking the completeness of credit application files, background research on prospective debtors, assessing the ability to pay prospective debtors, assessing collateral offered by prospective debtors, and preparing recommendations for granting or refusing credit.
- According to Firdaus & Ariyanti (2009: 184), credit analysis is a process carried out by a bank to assess whether a prospective debtor is eligible or not given a credit facility based on certain aspects.
2. Credit Analysis Function
Credit analysis has several important functions for finance companies or financial institutions, including:
1. Assist finance companies or financial institutions in making decisions when providing loans to prospective borrowers.
2. Assisting finance companies or financial institutions in determining the amount of the loan according to the needs and capabilities of the prospective debtor.
3. Manage the loan portfolio optimally and control risks that may arise from lending.
4. Monitor business development and payment of prospective borrowers during the loan period.
3. Principles of Credit Analysis
In conducting a credit analysis, there are several principles that must be considered by a credit analyst. These principles aim to ensure that credit analysis is carried out objectively, accurately, and comprehensively. The following are some commonly used credit analysis principles:
3.1 5C Principle
The 5C principle is a principle that refers to five main aspects that must be considered in conducting credit analysis, namely:
Collateral is a guarantee offered by a prospective debtor as a form of protection in the event of default. This collateral can be in the form of physical assets, such as land, buildings, vehicles, or other valuables, or non-physical assets, such as securities, insurance policies, or claim rights.
In assessing collateral, credit analysts must pay attention to value, liquidity, legality, and the relationship between collateral and the prospective debtor's business.
Conditions are economic, social, political, legal, and environmental conditions that affect the business of prospective debtors. This condition can be macro (national or global) or micro (local or sectoral).
In assessing conditions, credit analysts must pay attention to factors such as economic growth, inflation, interest rates, currency exchange rates, market competition, government regulations, technological changes, and social issues that are relevant to the prospective debtor's business.
Capital is the capital owned by the prospective debtor to run his business. This capital can come from internal sources (such as retained earnings or equity) or external sources (such as loans or venture capital).
In assessing capital, credit analysts must pay attention to the amount of capital owned by prospective borrowers, the capital structure used (debt to equity ratio), and the ability of prospective borrowers to increase capital if needed.
Capacity is the ability of the prospective debtor to generate income and profits from his business. Capacity also includes the ability of the prospective debtor to repay the loan according to the agreed schedule and interest.
In assessing capacity, credit analysts should consider factors such as sales volume, profit margins, operating cash flows, investment cash flows, financing cash flows, and relevant financial ratios (such as liquidity, solvency, profitability, and activity ratios).
Character is the character or attitude of the prospective debtor in running his business and managing his finances. The character also reflects the integrity and reputation of the prospective debtor in the eyes of customers, suppliers, employees, and the public.
In assessing character, credit analysts must pay attention to factors such as educational background, work experience, credit history, payment behavior, business ethics, and the potential debtor's commitment to his business.
3.2 5P Principle
The 5P principle is a principle that refers to five main aspects that must be considered in conducting credit analysis in the micro, small and medium enterprises (MSMEs) sector, namely:
Parties are parties involved in the prospective debtor's business, such as business owners (owner), business management (manager), business employees (employees), business customers (customers), business suppliers (suppliers), and business partners (partners). In assessing the party, the credit analyst must pay attention to factors such as the number of parties involved in the prospective debtor's business
Payment is a payment made by a prospective debtor to a bank or other financial institution as a form of loan repayment. This payment includes the loan principal (principal), loan interest (interest), loan administration fees (fees), and late loan payment penalties (penalty). In assessing payments, credit analysts must pay attention to factors such as the number of payments that must be made by prospective debtors
Profitability is the level of profit generated by the prospective debtor's business from its operational activities. Profitability also reflects the efficiency and effectiveness of prospective debtors in managing their resources. In assessing profitability, a credit analyst must pay attention to factors such as operating revenues, operating expenses, operating profits, and relevant financial ratios (such as the ratio of profit to sales, ratio of profit to capital, and profit ratio). to assets).
The purpose is the purpose or reason for the prospective borrower applying for a loan from a finance company. This goal can be in the form of working capital, investment, expansion, diversification, or others. In assessing the purpose, the credit analyst must pay attention to factors such as the compatibility of the loan objectives with the prospective debtor's business, the feasibility of the loan objectives from a technical and economic perspective, and the impact of the loan objectives on the prospective debtor's business.
Personality is the personality or characteristics of the prospective debtor that influence his behavior and business performance. Personality also reflects the motivation and interest of the prospective debtor in his business. In assessing personality, credit analysts must pay attention to factors such as vision, mission, goals, values, attitudes, abilities, skills, and experience of prospective debtors in running their businesses.
3.3 3R Principle
The 3R principle is a principle that refers to three main aspects that must be considered in conducting credit analysis in the agricultural sector, namely:
Returns are the results or yields expected by prospective debtors from their agricultural business. These returns can be in the form of yields, income, profits, or added value. In assessing returns, the credit analyst must pay attention to factors such as the type of crop or livestock cultivated by the prospective debtor, the area of land or the number of livestock owned by the prospective debtor, the productivity of the crops or livestock cultivated by the prospective debtor, the selling price of the crops or livestock cultivated by the prospective debtor, and the cost of producing crops or livestock that the prospective debtor is trying to cultivate.
Repayment is a payment made by a prospective debtor to a bank or other financial institution as a form of loan repayment. This payment includes the loan principal (principal), loan interest, loan administration fees, and late loan payment penalties (penalty). In assessing repayment, credit analysts must pay attention to factors such as the number of payments that must be made by the prospective debtor.
4. Duties of a Credit Analyst
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A credit analyst or credit analyst is a person who is responsible for carrying out credit analysis according to the principles previously described. A credit analyst must have sufficient knowledge and skills in accounting, finance, economics, statistics, law, and communications.
The following are some of the duties of a credit analyst that we have summarized from various existing sources:
1. Collect and verify the data needed to carry out credit analysis, such as personal data of the prospective debtor, business data of the prospective debtor, financial data of the prospective debtor, collateral data of the prospective debtor, and data on external conditions that affect the business of the prospective debtor.
2. Make a report containing the results of credit analysis, conclusions, and recommendations for granting or rejecting credit to prospective borrowers.
3. Present credit analysis reports to parties authorized to make decisions on granting or rejecting credit, such as credit committees, credit managers, or credit directors.
4. Monitor business development and payment of prospective debtors during the loan period, and report any problems or irregularities that occur to the authorities.
5. Prepare and submit periodic reports on loan portfolios, such as bad credit reports, non-performing credit reports, current credit reports, and collectibility credit reports.
Thus the article about credit analysis can convey. Hopefully, this article is useful for those of you who want to know more about this term. If you need financial assistance in the form of a fast disbursement loan, don't hesitate to apply at BFI Finance. We are ready to help you quickly, easily, and safely.