Saturday, October 23, 2010

What Techniques Should A Credit Analyist Use For Consumer And Small Business Lending

There are some techniques which a credit analyst should use to assess the consumer(individual) and small business lending. Individual consumer loans are scored like mortgages, often without the borrower ever meeting the loan officer. Unlike the mortgage loans for which the focus is on property, however, non mortgage consumer loans focus on the individuals ability to repay. Thus credit scoring models for such loans would put more weight on personal characteristics such as annual gross income, the Total Debt Service score, and so on.
Small Business are more complicated for a credit analyst, because the FI is frequently asked to assume the credit risk of an individual whose business cash flows require considerable analysis, often with incomplete accounting information available to the credit analyst. The pay off for this analysis is also small, by definition, because loan principal amounts are usually small. A $50,000 loan with a 3% interest spread over the cost of funds provide only $1500 of gross revenues before loan loss provisions, monitoring costs, and allocation of overheads. This low profitability has cause many Financial Institution to built small business scoring model. These models often combined computer bases financial analysis of borrower financial statements with behavioral analysis of the owner of the small business.
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