Credit Analysis Fundamentals

Before you start: [Financial Accounting](/academies/finance/accounting-basics/overview) basics (reading a balance sheet, income statement, cash flow statement) are assumed — credit analysis is applying those documents to a specific decision.

Why This Exists (The Hook)

A loan applicant's financial statements can look profitable on paper while still being a genuinely bad credit risk — revenue can be growing while margins quietly compress, or a business can show accounting profit while its actual operating cash flow can't cover its own debt payments. Credit analysis exists because "are they profitable" and "can they actually repay this specific loan, on these specific terms" are different questions, and answering the second one requires a structured framework (the 5 Cs, specific ratios like DSCR) rather than just glancing at the bottom line.

Analogy — Think of credit analysis like a home inspector's structured checklist, not a quick walkthrough. A quick walkthrough of a house might miss a foundation crack hidden behind furniture or a roof leak that's only visible after rain. A structured inspection checklist (foundation, electrical, plumbing, roof) systematically checks every category regardless of how good the house looks at first glance. The 5 Cs of Credit work the same way — Character, Capacity, Capital, Collateral, Conditions each force a check that a quick "do they look profitable" glance would miss, like catching a strong income statement sitting on top of dangerously weak actual cash flow.

Try it (2 minutes) — Reason through why DSCR (Debt Service Coverage Ratio) below 1.0 is a specific red flag, without looking anything up: DSCR = cash flow available to cover loan repayment (principal + interest) — think of it as "how many times over can this cash flow cover the required payment." A DSCR of 1.0 means the available cash flow exactly equals what's owed, with zero cushion. If DSCR drops below 1.0, what does that mean is happening every single payment period — is there enough operating cash flow to cover the debt payment, or does the borrower need to find money from somewhere else (savings, new borrowing) just to stay current? Why would that be a fundamentally different (and worse) situation than a borrower who's merely "less profitable than hoped"?

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

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Key Financial Ratios for Lending Decisions

Reading Financial Statements for Credit Risk

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.