After studying this chapter you will be able to understand: Evaluation of Loan proposals Which variables should be consider? Negotiable instrument, what are the two features of negotiable instruments? | Revise Lecture 22 Evaluation of Loan proposals Which variables should be consider? Loans and Advances Evaluation of Loan proposals While evaluating the proposal, bank should assess not only the ability of the client to pay back the loan but also his willingness to repay. They need to consider the following variables while evaluating a loan proposals; Loans and Advances Evaluation of Loan proposals Industry level credit analysis: It needs to be performed to study the prospects of the industry and it most importantly includes a study of the Industry cycle Threat from substitutes Shifts in consumer demands Regulatory environment Loans and Advances Evaluation of Loan proposals Operational Efficiency: The company level credit rating is conducted to assess the operational efficiency of the client company. The critical aspects that are to be evaluated in this process fall into the following categories; Operating margins Stability and growth of market share Access to key raw materials Benefit | Revise Lecture 22 Evaluation of Loan proposals Which variables should be consider? Loans and Advances Evaluation of Loan proposals While evaluating the proposal, bank should assess not only the ability of the client to pay back the loan but also his willingness to repay. They need to consider the following variables while evaluating a loan proposals; Loans and Advances Evaluation of Loan proposals Industry level credit analysis: It needs to be performed to study the prospects of the industry and it most importantly includes a study of the Industry cycle Threat from substitutes Shifts in consumer demands Regulatory environment Loans and Advances Evaluation of Loan proposals Operational Efficiency: The company level credit rating is conducted to assess the operational efficiency of the client company. The critical aspects that are to be evaluated in this process fall into the following categories; Operating margins Stability and growth of market share Access to key raw materials Benefit from economies of scale Loans and Advances Evaluation of Loan proposals Financial Efficiency: Repayment of the loan by the clients depends greatly on their financial soundness. Hence financial analysis becomes an imperative part of credit risk analyst. It includes an analyses of; Financial leverage Cost of capital Working capital management Interest rate risk management Loans and Advances Evaluation of Loan proposals Management Evaluation: The management evaluation throws light on the willingness of the client to repay. It includes a study on the performance of the promoter, top management and also the performance of group companies under the same management. Negotiable Instrument Negotiable Instrument The term ‘negotiable instrument’ consists of two parts, viz, ‘negotiable’ and ‘instrument’. The word ‘negotiable’ means ‘transferable by delivery’ and the word ‘instrument’ means ‘written documents by which a right is created in favour of some person’ Negotiable Instrument It means an
