Question

Discuss the importance of a bank’s credit culture in managing credit risk. What are the five C’s of credit? Discuss their importance in credit analysis.

Answer 1

The five C's of credit are :

1. Character

2. Capacity

3. Capital

4. Conditions

5. Collateral

Importance of the five C's in credit analysis:

1. Character is essential to know the repayment history of the borrower and his intentions to pay the proposed loan.

2. Capacity is used to determine the financial capabilities of the borrower and if he has sufficient incomes to pay back the loan

3. The capital investment is the equity in the investment that the borrower is willing to put in. It shows that the borrower's liquidity position.

4. The conditions to the loan agreement are essential to the borrower agreeing to the terms of the loan.

5. Collateral is important to determine the assets pledged for the loan. The higher the collateral value , the safer the loan is for the bank.