5 C,s of selecting Good Borrower
Selection of Good Investment Client:
Investment is a very important function in a commercial bank but the riskiest task. Generally, it is difficult to recover the principal amount with profit from investment client if there is no proper selection & evaluation. If a bank mistake for selecting the right client, in the longer time, it will create more suffering to the branch. So before investment to the client, the bank has to think about the collection of Investment. In this case, investment client selection is the most important. The banking industry has created a ‘quality’ scale for evaluating investment clients. An understanding of the 5 C’s of investment is very important for an individual or business approaching the bank for an Investment.
The 5 C’s of investment are:
✓Character ✓Capacity ✓Capital ✓Collateral ✓Conditions
Character denotes integrity of the investment client i.e. he should have the willingness to repay the money borrowed. The banker should investigate every aspect of the character factor and should convince himself that despite adverse conditions, the applicant will make every effort to discharge his debt as per terms. The character is often a subjective judgment made by the banker about the prospective client. One way this is demonstrated by their handling of past obligations. Credit reports and transaction checks with other banks will provide objective data and meetings between the investment client and Bank will provide a subjective assessment.
Capacity means the ability to employ the funds profitably according to the terms and conditions. The capacity of the investment client has to be determined to find out his experiences in the line in which he is working. Banks will also utilize an objective formula called the Debt Coverage Ratio. Leverage
Capital denotes financial soundness. The investment client must have his own stake in the business which creates a sense of involvement in the mind of the investment client. Capital is the financial strength of a risk as measured by the equity or net worth of the business; the assets that exceed liabilities (debt). This can be a very complicated area as the bank is looking at both tangible and intangible assets, personal capital and the amount an individual has contributed toward the business. Banks want to see that the investment client has made a financial commitment and has invested in the company.
Conditions are forces in the general business, political and social environment that may affect borrowing. Demand for the product or service, competition in the marketplace, the general economic conditions of the community and the industry can all have an effect on the bank’s willingness to approve a loan.
Collateral is something of value that can be used to secure a promise of loan repayment. Although cash flow will almost always be the primary source of repayment for a loan, bankers also look at a secondary source of repayment. All of the collateral that may be made available to the bank will not make a bad investment good but it will make a good investment better. There are a number of items that can be considered collateral including machinery and equipment; real estate, both business and personal; accounts receivable and inventory; and, liquid assets such as personal cash or marketable securities. In most cases, banks will require a personal guarantee for a loan. While assessing the valuation of collateral securities bankers need to take extra care by sampling survey and by examining information from land revenue office and also enquiring people nearby. The documents of the collateral securities are to be verified from the concerned Sub-Registered Office and other related offices.