Credit Analysis — Quick Reference

The 5 Cs

C	Checks

|---|---|

Character	CIBIL/credit bureau score, past defaults, repayment history
Capacity	DSCR, debt-to-income, cash flow statements
Capital	Net worth, owner's equity contribution ("skin in the game")
Collateral	Asset valuation, loan-to-value ratio (varies by asset type)
Conditions	Industry outlook, interest rate environment, sector-specific risk

Key ratios

DSCR = Cash Available for Debt Service ÷ Total Debt Service
     (adjust operating cash flow for MAINTENANCE capex first)
     Below 1.0 = operations alone don't cover obligations
     Typical minimum acceptable: 1.2-1.5x (varies by lender/loan type)

Interest Coverage Ratio = EBIT ÷ Interest Expense
Debt-to-Equity Ratio = Total Debt ÷ Total Equity
Current Ratio = Current Assets ÷ Current Liabilities

Three-statement connected reading

Income statement: revenue growth — genuine or margin-compressing?
Balance sheet: is receivables growth outpacing revenue growth?
  (warning sign — growth not yet converting to cash)
Cash flow statement: does operating cash flow actually confirm
  the income statement's growth story?
Read together — not as 3 independent checklists.

Early warning signals (before the 90-day NPA mark)

[ ] DSCR trending down across consecutive quarters
[ ] Deteriorating receivables aging
[ ] Increasing reliance on short-term debt for operational needs
[ ] Delayed/incomplete financial reporting
[ ] Proactive covenant-waiver or restructuring requests
[ ] Key management departures / ownership changes
A single weak data point ≠ a trend — look for consistency across
multiple signals over multiple quarters.

Collateral realizable value (book value ≠ recovery value)

Inventory     — significantly less than book in forced liquidation
Receivables   — correlated risk with borrower's own distress
Real estate/fixed assets — generally more reliable, still market-dependent

NPA basics (India)

90 days overdue (principal or interest) = NPA
Monitor early warning signals well BEFORE this threshold

Restructuring decision framework

Temporary, addressable cause      → extend/modify terms
Ongoing risk, needs protection    → additional covenants/security
Fundamentally non-viable business → recovery/enforcement action
Match the RESPONSE to the underlying CAUSE, not just the symptom

Portfolio-level risk (beyond individual borrower analysis)

Concentration risk — too much exposure to one industry/geography/borrower
Correlation risk — do borrowers' defaults move TOGETHER under stress
Stress testing — model adverse scenarios (rate rise, sector downturn)
  to surface vulnerabilities current-conditions analysis misses

Credit rating scale reference

AAA (highest safety) → down through → D (default)
CRISIL, ICRA, CARE — India's major rating agencies
Monitor rating TRAJECTORY, not just point-in-time rating