When a person or company requires additional funds to support business development, one way to get these funds is to apply for credit at a bank.
However, before the bank approves the credit, they carefully analyze the credit application. This process aims to ensure that the borrower has the ability to repay the credit in accordance with the terms that have been established.
In this article, we will explain in detail the credit application analysis process usually conducted by banks.
What is credit analysis
Credit analysis is an assessment process carried out by a bank or other financial institution to determine whether a credit application is worthy of approval or not.
Aside from checking the required documents, the credit analysis process also involves evaluating other aspects of the borrower, such as the character, capacity, and guarantees that prospective borrowers offer.
Credit analysis aims to reduce risk for the bank and ensure that the borrower has the ability to repay the loan.
The purpose of credit application analysis
The main purpose of credit application analysis is to protect the bank’s interests and minimize credit risk. However, there are several specific purposes that we need to know, including:
- Assess borrower ability: The bank needs to assess the borrower’s ability to repay the loan on time.
- Assess credit risk: the bank should also assess the credit risk related to the credit application. This involves analyzing the possibility that the borrower may face financial difficulties that will affect their ability to repay the loan.
- Identifying collateral: If the credit is secured by assets or other collateral, the bank needs to assess the value of the collateral and how easily the asset can be sold if the borrower defaults.
The credit application analysis process uses the 5C principles
The credit application analysis process usually follows the 5C principle, which contains five main aspects that banks or other financial institutions must evaluate: character, capital, capacity, condition, and collateral.
1. Character (the borrower’s character)
This aspect consists of an assessment of the borrower’s reputation and integrity. The bank will check the borrower’s credit history, whether they have a good or bad payment history.
2. Capital (capital owned)
The bank will assess how much capital the borrower owns and to what extent they have an interest in the success of the project or business that requires credit.
3. Capacity (the ability to repay a loan)
The ability of borrowers to repay loans is assessed by their income, debt load, and general financial capability.
4. Condition (borrower’s or industry’s economic condition)
The bank will evaluate the economic condition of the industry, which may affect the borrower’s ability to repay credit.
For example, if the borrower is a company in the automotive industry and the condition of people’s purchasing power is decreasing, the bank will use this condition as a consideration in deciding whether to approve the loan or not.
5. Collateral
If credit is secured by collateral, the bank will assess the value of the collateral as well as the extent to which the collateral can reduce credit risk. For example, the amount of a loan secured by a land certificate will be higher than a loan secured by a vehicle certificate.
The process of credit application analysis with the 5P principles
Besides the 5P principles, banks can also use the 5P principles to analyze credit applications. What are the 5Ps?
1. Personality
The bank will assess the borrower’s personality, including integrity, motivation, and other personal characteristics that affect their ability to repay credit.
2. Purpose
The bank will assess the purpose of credit use, including whether it is for investments with the potential to generate revenue or for purely consumptive uses. Usually, if a borrower applies for consumptive purposes, approval will be difficult.
3. Prospect
The prospects of the business or project requiring credit are also assessed, including growth potential and profitability.
4. Payment
The bank will evaluate the borrower’s ability to make payments according to a set schedule.
5. Party
Borrower characteristics such as gender, age, or social group are also factors that can be considered in the credit analysis process.
For example, the probability of an application being accepted for borrowers with permanent employee status may be higher than for those with contract employee status.
OCR tools help banking companies analyze the credit application process
In conclusion, the credit application analysis process carried out by banks is an important step in ensuring financial sustainability and reducing risk.
By understanding principles such as 5C and 5P, borrowers can better prepare when applying for credit and increase their chances of getting approval.
In the analysis process, banks typically use advanced tools such as Optical Character Recognition (OCR). OCR ensures that the information required for credit assessment can be accessed and processed quickly and accurately.
One of the most trusted OCR tools in Indonesia is OCR+ from Fintelite. OCR+ can be accessed via https://fintelite.ai/. For bank institutions that want to try out the advance, can get free consultation services from Fintelite’s expert team.
