Week 43 (10.2.08)

Learn

The 5Cs and 5Ms in credit application - from THE STAR article dated 28th Dec 1989

Evaluating a credit application - what bankers look for?

• The 5Cs stand for Character, Capacity, Capital, Conditions and Collateral
• The banker will evaluate each of the Cs to determine risks associated with it are acceptable to him.
• Character - A banker will usually base his evaluation of the character of the borrower on his past experiences with him, the paying record of the borrower (with him and other creditors), market talk and how the borrower conducts himself during interviews and negotiations.
• Capacity - refers to the borrower's ability to repay the bank. Involves determining the borrower's net income, ie income after all expenses have been accounted for.
• Capital - refers to the financial backing or strength of the business. It is measured by the equity or net worth of the business, and will determine how much the banker will get back if the business is terminated. The banker will, however, consider the market rather than the book value of the assets.
• Conditions - refers to the conditions of the environment the business is in eg want to know how the business will be affected when, for example, there are changes in the economic conditions, the technological conditions, the political conditions, the regulatory conditions, etc.
• Collateral - is usually asked for by bankers when there is a weakness in one or more of the other Cs, except character. A banker looks at collateral only as a secondary source of repayment.

Instead of 5Cs, some bankers may use the 5Ms in their evaluation exercise. The 5Ms stand for:

• Men - the people behind the business - the owners, the managers & employees
• Money - equivalent to capital, as above
• Market - borrower's marketing strategies and how much they can sell
• Machines - refers to machines and equipment the borrower owns and their ability to produce what they sell
• Materials - ability of the borrower to source their raw materials

The 5Cs and 5Ms are not all that a banker will look at when evaluating a credit application. They are the main areas of investigation though.

Unlearn

New informations gathered and no unlearn. It is more complex than what i think for bank to approve credit application.

Relearn

Now i understand:

When i applied for individual housing loan, the bank actually asked for:

1. To determine my "Capacity"- payslip & EA form

2. To determine my "Character" - last 6 months account statements

Week 42 (3.2.08)

Learn

From perspective of Lenders or creditors (banks, investors in corporate bonds, trade creditors)

Credit analysis also involves the use of fundamental analysis. The primary focus here is not about making investment profits, but about ensuring the security the capital and the ability of the borrowing company to service the debt.

• Evaluating whether to extend funds to corporations, and whether a credit period should be allowed by trade creditors;
• Monitoring changes in the creditworthiness of companies and the security of capital; and
• Assessing compliance with debt covenants

Unlearn

New informations and learning. Nothing unlearn.

Relearn

I imagine if i set up a company:

• When paying back the debt on loan, first is to pay the bank loan, subsequently pay the tax and finally only pay the dividend to my shareholders.
• This is in line with the primary focus of bankers which is to ensure the security of capital and ability of borrowing company to service the debt.