The process of determining a borrower’s creditworthiness is called credit analysis. Assessing the risk of default and choosing the right interest rate and terms for a loan or other sort of credit facility are the two main objectives of credit analysis.
Fundamental analysis and technical analysis are the two primary categories of credit analysis.
Fundamental credit analysis is the process of assessing financial accounts such as income statements and balance sheets and other pertinent data to assess a borrower’s financial standing. This kind of study evaluates the borrower’s capacity for loan repayment and debt management by examining a number of financial parameters including the current ratio and debt-to-equity ratio. To assess the company’s future prospects, the analyst additionally considers macroeconomic conditions and industry development.
On the other side technical credit analysis is a statistical evaluation of a borrower’s past performance, including defaults and recoveries, to forecast future performance. The credit risk of a borrower is assessed using a variety of variables such as past credit ratings, bond spreads and default probabilities.
Many financial institutions and investors, including banks, investment banks, bond rating services and hedge funds utilise credit analysis to assess the risk of lending money to organisations, governments and private individuals.
The organisation or investor needs to conduct a credit study to make sure it is providing money to people who will be able to pay it back. The study assists in deciding on a loan’s interest rate and the quantity of collateral needed. Furthermore, the credit analysis is essential for assessing credit risk so that they can move swiftly if they suspect the borrower is going to fail on the loan.
