When it comes to lending to a borrower, the credit lending institutions invariably are in a position to adhere to certain rules and regulations. There should be a systematic approach during the course of adopting the financial analysis scheme and the following steps can be adopted for effective implementation of the scheme:
Preliminary investigation: During the course of preliminary investigation by the credit managers, the following activities are to be necessarily conducted namely:
· Conducting the visits to the units and factories;
· Conducting an interview with the management of the company and such exercise should be effectively utilized in gathering as much information as possible;
· The nature of business should be understood properly;
· The operating cycle differs from one industry to another industry and the credit manager should gain knowledge about the operating cycle of the industry;
· The history of the company, background, capability of the management, the net worth of the promoters outside the business, if any, should be investigated thoroughly and required information should be gathered and
· Wherever necessary, necessary OPL from other bankers should be obtained.
Examining the financial performance:
The credit manager should take sufficient time in examining the annual reports submitted by the company. During such examination, he should study scrupulously the notes on accounts and schedules to the balance sheet and profit and loss account. He should also make necessary modifications/split the information wherever necessary.
Spreading and common sizing quantitative analysis:
Towards understanding and analyzing the quantitative performance of the company the following tools are found to be highly useful namely; Income statements, details of sales performance during the period, balance sheet, profit and loss account, receipts and payments account, funds flow statement, cash flow statement, details of ratio analysis like liquidity ratio, solvency ratio and marketability ratio etc.
During the course of interface conducted with the top management and credit managers, information about the following can be easily ascertained namely; historical trend, industry comparable, projection and current trend etc.
Such interface can be conducted using the resume submitted by the borrowers, auditor's reports on the financial reports and tools employed for arriving various credit risks namely; management risk, financial risk, business risk and market risk etc.,
Interpretive analysis:
In order to gather sufficient information about the interpretive analysis, the following tools are found to be highly useful namely; trend analysis, variance analysis, comparative analysis, analysis of social accounts and surrogate analysis.
Sanctioning of the limits:
It is the responsibility of the credit manager to ensure that need based limits are sanctioned and towards this end, the request for credit should be structured effectively so that it matches with repayment sources and income generation.
Wherever necessary, the personal guarantee of the directors can be stipulated.
Follow up:
The loan accounts should be properly followed up and strategic plans should be formulated so that the loan accounts are monitored on monthly basis and a special task force can be utilized for this purpose.
The credit manager should emphasize more importance towards recovery aspects and there should not be any compromise in this connection at any point of time.
