Credit Analyst/Banking

Also what ratios (liquidity, leverage, etc.) you’ll look into as relationship person and what as credit person while on boarding a new corporate.

As a relationship person, when onboarding a new corporate client, the key ratios I would look into would primarily be liquidity and profitability ratios. Liquidity ratios such as the current ratio and quick ratio would help assess the company’s ability to meet its short-term obligations. These ratios indicate the availability of liquid assets to cover current liabilities and provide insights into the company’s financial stability and cash flow management.

Profitability ratios, such as return on assets (ROA) and return on equity (ROE), would help evaluate the company’s ability to generate profits and maximize shareholder value. These ratios provide an understanding of the company’s efficiency in utilizing its assets and equity to generate income.

Additionally, as a relationship person, I would also consider other ratios such as the debt-to-equity ratio and interest coverage ratio to gauge the company’s leverage and debt-servicing capacity. These ratios provide insights into the company’s financial risk and ability to manage its debt obligations.

On the other hand, as a credit person, I would focus more on the credit risk aspect and delve into ratios such as the debt service coverage ratio (DSCR) and the interest coverage ratio. These ratios help assess the company’s ability to generate sufficient cash flow to cover its debt obligations. The DSCR specifically indicates the company’s ability to service its debt, including interest and principal payments, and is crucial in determining the company’s creditworthiness.

Furthermore, I would analyze the company’s leverage ratios, such as the debt-to-EBITDA ratio, to evaluate its overall debt burden and repayment capacity. This ratio helps assess the company’s ability to generate earnings before interest, taxes, depreciation, and amortization (EBITDA) to cover its debt obligations.

In summary, as a relationship person, my focus would be on liquidity and profitability ratios to assess the company’s financial stability and profitability. As a credit person, I would emphasize ratios related to credit risk and debt-servicing capacity to evaluate the company’s creditworthiness and repayment ability. The specific ratios considered may vary depending on the industry, company size, and other relevant factors.

And also what’s your understanding of the difference between credit and relationship manager.

In the banking industry, the roles of a credit manager and a relationship manager are distinct but interconnected. While both roles involve client engagement and managing client relationships, they focus on different aspects of the banking process.

A credit manager primarily deals with the analysis and evaluation of creditworthiness and risk associated with lending activities. They assess the financial position, credit history, and repayment capacity of borrowers to determine the feasibility of extending credit. Credit managers play a critical role in mitigating credit risks for the bank by setting appropriate lending terms, establishing credit limits, and ensuring compliance with regulatory requirements. They work closely with underwriting teams, conduct thorough credit assessments, and make informed decisions regarding loan approvals or rejections.

On the other hand, a relationship manager is responsible for building and maintaining strong relationships with clients. They act as the primary point of contact for clients, understanding their financial needs, and providing personalized banking solutions. Relationship managers focus on nurturing long-term client relationships by offering a range of products and services tailored to meet client goals. They proactively engage with clients to identify opportunities for cross-selling and upselling, provide ongoing support, and address any concerns or issues that may arise. Relationship managers act as trusted advisors, ensuring client satisfaction and loyalty.

While credit management is a specific function within the banking process, focusing on risk assessment and lending decisions, relationship management encompasses a broader scope. Relationship managers oversee the entire lifecycle of the client relationship, from onboarding to ongoing monitoring and support. They collaborate with credit managers when it comes to evaluating creditworthiness and structuring lending solutions, but their role extends beyond credit-related matters. Relationship managers are responsible for overall client satisfaction, revenue generation, and maximizing the value of the client relationship.

In summary, the credit manager’s role revolves around credit analysis and risk assessment, while the relationship manager focuses on building and maintaining strong client relationships and providing comprehensive banking solutions. Both roles are crucial in ensuring the success and profitability of the bank, albeit with different areas of expertise and responsibilities.

What are IRAC norms?

IRAC (Income Recognition, Asset Classification, and Provisioning) norms are guidelines issued by the Reserve Bank of India (RBI) to ensure prudent and transparent recognition of income, classification of assets, and provisioning for potential loan losses by banks and financial institutions. These norms play a crucial role in maintaining the stability and integrity of the banking sector.

1. Income Recognition: IRAC norms provide guidelines for the recognition of income earned by banks from their loan portfolios. It specifies that income should be recognized only when it is realized or there is reasonable certainty of its realization. This helps in ensuring that banks do not overstate their income based on anticipated earnings that may not materialize.

2. Asset Classification: Asset classification refers to the categorization of loans and advances into different categories based on their credit quality and repayment status. IRAC norms provide a standardized framework for asset classification, primarily based on the repayment behavior of borrowers. Assets are classified into various categories, such as standard assets, sub-standard assets, doubtful assets, and loss assets, based on the level of risk and the likelihood of repayment.

3. Provisioning: Provisioning refers to setting aside funds by banks as a precautionary measure to cover potential loan losses. IRAC norms prescribe the minimum provision requirements for each category of assets based on the risk associated with them. The provisions act as a buffer to absorb potential losses and maintain the financial health and stability of banks.

By following the IRAC norms, banks can ensure transparency, prudence, and accuracy in recognizing income, classifying assets, and provisioning for potential loan losses. These norms help in identifying and addressing potential risks in a timely manner, maintaining the quality of loan portfolios, and safeguarding the interests of depositors and other stakeholders. Compliance with IRAC norms is mandatory for banks and financial institutions in India and is regularly monitored by the RBI to ensure the soundness of the banking system.

What ratios you will look for when giving credit?

When assessing the creditworthiness of a company, several key ratios are commonly considered to evaluate its financial health and ability to repay its obligations. Here are some important ratios to consider when giving credit:

1. Current Ratio: This ratio indicates a company’s ability to cover its short-term obligations with its short-term assets. A higher current ratio (ideally above 1) suggests better liquidity and the ability to meet short-term debt obligations.

2. Debt-to-Equity Ratio: This ratio assesses the company’s leverage and indicates the proportion of debt to equity financing. A lower debt-to-equity ratio signifies lower financial risk and a higher ability to repay debts.

3. Debt Service Coverage Ratio (DSCR): This ratio measures a company’s ability to cover its debt payments from its operating income. A higher DSCR (typically above 1.2) indicates a stronger ability to service debt obligations.

4. Operating Profit Margin: This ratio shows the company’s profitability by measuring the percentage of each sales dollar that represents operating profit. A higher operating profit margin indicates better profitability and the ability to generate sufficient cash flows to meet debt obligations.

5. Return on Assets (ROA): This ratio evaluates the company’s efficiency in generating profits from its assets. A higher ROA suggests better utilization of assets and the potential to generate sufficient earnings to meet debt payments.

6. Cash Flow-to-Debt Ratio: This ratio compares a company’s cash flow from operations to its total debt. A higher cash flow-to-debt ratio demonstrates a healthier ability to generate cash flow for debt repayment.

These ratios provide insights into a company’s liquidity, solvency, profitability, and ability to meet debt obligations. It is important to consider industry benchmarks and trends while analyzing these ratios, as appropriate ratios may vary across industries. Additionally, it is essential to assess other qualitative factors such as business model, management strength, and market conditions alongside these ratios to make a comprehensive credit decision.