Credit Evaluation: How much information is Enough?

At the outset, a very happy new year to all!

As the grind for the last and defining quarter of the FY is about to start, sermons from the senior management on ‘Big Calls’ of joint efforts between credit and business, would be discoursed!

Unlike manufacturing, where gestation for break even and profits is long, in Banking, profits are earned from day 1 of the booking of the account, whereas losses are back ended. Money is earned in interest, but losses are incurred in ‘Principal Value’ (principal is equivalent to 30x of NIMs earned). Time is of essence.

The moot point is, how should we make the right credit decision with optimum level of information! Based on my experience, I am summarizing some issues faced by the business and credit managers and am making some suggestions to iron out the credit process –

1. What’s the right time for credit officers meet client?

There are instances when credit managers shy away from client meetings; not wanting to be in the hot seat. But after the meeting, invariably, the person comes out optimistic.

However, a client meeting becomes useful and effective, if there is adequate critical information available to the manager to have a meaningful discussion. These meetings should not be used as a means for soliciting basic information, rather focus should be on having issue based discussions.

2. Should one ask for more information after customer meeting?

A good credit manager will use customer meeting as a tool to get to the final decision. One should normally not seek voluminous information after having met the customer, barring certain granular requirements.

Credit managers do come under tremendous pressure to make a decision post the discussion. There are, at times pampered customers, who are not forthcoming in sharing all the information. We need to keep in mind that all businesses and balance sheets may not be easy to comprehend and hence, managers have to show the maturity to deal with such situations tactfully.

3. Good to know vs need to know information for decision making

It is often alleged that credit managers call for too much information, at times not important to the decision-making process. Here, my advice to credit risk teams is that, one should stop seeking information the moment one feels that bank’s money is safe and will come back with returns. Good-to-know information means loss of income for the bank for the period the proposal is festering in the system.

For example – Company having a turnover of 100 crs, EBIDTA of 25 crs, Debt/EBIDTA < 2x, free cash balance of 10 crs, stable business model and rating of BB+ or BBB-. Whilst the rating can be a downer, continuously harping on the rating without appreciating the credentials, can be an over kill. We need to keep in mind, that rating agencies are bound by templated approaches and they often constrain and suffocate the hapless SME customers, for keeping the rating matrices intact.

4. Trust your gut ! Chasing perfection can lead to pessimism

Broadly, the above case looks doable unless the pre-checks on CIBIL, CRILC and background checks are not favourable. Good managers will develop a gut for decision making and the rest of the information can be sought for regulatory compliance. By no means, one is suggesting to not understand the business model, however, to keep suspecting and laying undue stress on ratings can lead to procrastination. Attempts to attain perfection in a case can lead to pessimism

5. Good financials vs un-favourable promoter background

At the same time, unsatisfactory and blemished promoter background is a strong ground to reject the proposal, regardless of the merits in financials. Banks now have strong filters to check the promoter antecedents. In my long banking career, I have not seen promoter’s behaviour change during tough times, though the relationship and credit teams change over time.

6. Importance of regulatory information / compliance in Credit Application

The mundane part of compliance on end use, capital market restrictions, assessment of bank finance and LC limits, priority sector compliance etc has to be understood and appreciated. It should not be a mere form filling exercise, as any non-compliance has significant implications for the management, who have to face the ire of the auditors and regulators.

The debate on ‘How much information is sufficient?’ is endless, but one has to keep in mind that time is of essence and facts do not lie. One has to be able to decide between decision making and perfection; what is important. Once this delicate balance is understood and appreciated, the process becomes seamless and works like a well-oiled machinery.