Submitting an application at a bank – for example for a mortgage loan – starts with a long process of valuation of the entire banking transaction. During this process, the bank submits for verification documents that were provided by the applicant – and this is just the beginning. The credit analysis is an important element that determines whether the bank will give the loan to the customer. The loan analysis consists of a number of elements on the basis of which the bank checks the creditworthiness of the applicant. During this procedure, a banking analyst may conduct three types of analysis, which include quantitative, qualitative and point analysis.
Financial analysis – step by step
The most important goal of a credit analysis is to examine the creditworthiness of a potential borrower and to assess the risk associated with granting a loan.
Credit risk is related to every loan granted, and its amount depends on many factors. The most important of them are:
- Financial situation of a person applying for a loan
- The amount of credit granted and the length of the repayment period
- Purpose of the loan
- Amount of own contribution contributed by the borrower
- The currency in which the loan was granted
- Type of collateral accepted by the bank
The method of conducting credit analysis depends on the group to which the potential borrower belongs. Other factors are taken into account in the case of applications submitted by natural persons and others when the bank is dealing with an entrepreneur.
Banks most often use three types of credit analysis:
- Quantitative analysis consisting in determining the amount and stability of the received income and comparing it with monthly expenses. The purpose of the quantitative analysis is to check whether the borrower will be able to repay the loan installments on time.
- Qualitative analysis, the purpose of which is to verify the characteristics of the borrower, which may affect the willingness to pay the loan repayment obligation in a timely manner. These include the age of the borrower, his marital status, education, occupation, place of residence and the number of persons belonging to the household. In this part of the analysis, the current credit history is also checked, the number of liabilities made in the past and timely repayment, the history of the bank account and the time when the client is connected to a given bank.
- Point analysis, i.e. Scoring, which is a point evaluation of both qualitative and quantitative characteristics. The characteristics of the borrower that are most important to the bank in the perspective of conducting the analysis are evaluated on a point scale, and their final result shows the total assessment of the client’s creditworthiness.
Credit analysis is the basic bank tool used for loans, especially mortgage loans. When granting high loans, the bank bears the risk, especially in the case of a long repayment period. That is why conducting a credit analysis is so important.