Credit Analysis Fundamentals

What a Credit Analyst Actually Does

A credit analyst decides — or recommends — whether a borrower (individual, business, or institution) is likely to repay a loan, and on what terms. This is distinct from general "banking knowledge" (RBI policy, regulation) — it's a specific, practical analytical skill.

The 5 Cs of Credit

C	What it means	What you check

|---|---|---|

Character	Borrower's repayment history and reputation	Credit bureau score (CIBIL in India), past defaults
Capacity	Ability to repay from cash flow	Debt-to-income ratio, cash flow statements
Capital	Borrower's own stake in the venture	Net worth, equity contribution
Collateral	Security offered against the loan	Asset valuation, loan-to-value ratio
Conditions	External/economic factors affecting repayment	Industry outlook, interest rate environment

Key Financial Ratios for Lending Decisions

•Debt-to-Equity Ratio — how leveraged is the borrower already?

•Interest Coverage Ratio (EBIT ÷ Interest Expense) — can earnings comfortably cover interest payments?

•Current Ratio — short-term liquidity to meet near-term obligations.

•Debt Service Coverage Ratio (DSCR) — cash flow available to cover loan repayment (principal + interest); DSCR below 1.0 is a red flag.

Reading Financial Statements for Credit Risk

1.Income statement — is revenue growth genuine, or margin-compressing?

2.Balance sheet — how much of the asset base is financed by debt vs equity?

3.Cash flow statement — does operating cash flow actually cover debt obligations, or is the borrower relying on financing activities to stay afloat?

NPA (Non-Performing Asset) Basics

In India, a loan becomes an NPA when principal or interest remains overdue for 90 days. Credit analysts monitor early warning signals (delayed payments, declining DSCR, industry stress) well before the 90-day mark to flag accounts for restructuring or recovery action.

Credit Rating Basics

External ratings (CRISIL, ICRA, CARE in India) compress this entire analysis into a letter grade (AAA down to D) — understanding what drives a rating change is core credit-analyst knowledge, even if you're not the one issuing the rating.

💡 Relationship to Banking & RBI Framework

The Banking & RBI page covers the regulatory environment credit decisions operate within (Basel III, NPA classification rules). This page covers the analytical technique used to actually make the lending decision — both are needed, but they're different skills.

Credit Analysis — Overview