It will be clear from the above study that advance, to be safe, should be granted to a reliable and honest borrower, who has the capacity to conduct his business. The study of a borrower involves the study of the three “Cs” of the party, i.e., his Character, Capacity and capital or, in other words, his Reliability, Responsibility and Resourcefulness.
Character: Character denotes integrity of the borrower, i.e., he should have willingness to repay the money borrowed. This is the greatest single asset any individual can have and is the first factor to be evaluated.
A person who is really honest will rarely change whatever be the testing factors. His determination to be honest and willingness to repay, when possible, will remain steadfastly like a rock.
This aspect is the good part of the security for any bank advance. However, honesty alone does not constitute character. Character of a customer, besides honesty, involves promptness in payment, willingness to carry out the promise in a planned way in order to keep the reputation with whom he deals.
To know about the borrower, the banker should proceed on the following lines:
- Who the borrower is and, what is his family background?
- What is the reputation of the borrower in business circles, both among his friends and competitors?
- Are his dealings with other businessmen honest?
- Are there instances where he was not sincere in honoring his commitments?
- Does he indulge in speculative activities?
- What is the reputation of the borrower among his employees?
An interview with the customer must give an impression to the banker about the prospective borrower. All these points have to be considered and a balanced opinion in regarded to the character of the borrower formed.
As a matter of fact, half of the worries of the lending banker are over after selection of the right type of borrower.
Capacity: Capacity means the ability to employ the funds profitably and repay the advance according to the terms and conditions of the sanction. The capacity of the borrower has to be determined and, for this purpose, enquiries will be necessary to fund out his qualifications and experience in the line in which he is working.
The commercial banks simply meet the short term capital requirements of a business firm established at the vital period of production. The borrower may need genuine financial accommodation to keep the wheels of production moving with the bank’s assistance.
Of course, after nationalization, banks are also providing finance on a small scale to new entrepreneurship who has technical know-how. Bankers have to collect information about the borrower as to
- what is his business and when did he start it?
- has he recently shifted to a new line of business?
- has he the required knowledge to carry on the business?
- is he well established in the business; what is the working result or is he steelmaking experiments to make his business steady?
- what is the popularity of his products in the market, compared to those of other units in the same industry?
All these study will enable the banker to arrive at a conclusion, whether the borrower has the capacity to run the business on sound lines.
Capital: Capital denotes financial soundness. The borrower must have his own stake in the business, i.e., he must take a part of the risk in the business. This is to be done by putting his own money into the business. That creates a sense of involment in the business in the mind of the borrower.
If he has sufficient capital of his own to invest in the business. If he has sufficient capital of his own to invest in the business, besides the advance applied for, he will be considered a more suitable borrower than one working entirely, or mostly, with borrowed money.
Of course, where the borrower cannot bring his own part of the capital, as in the case of advances to the weaker sections of the community and in many other genuine cases, bankers do finance the entire capital.
Some American authors have preferred to add two more C’s to these, viz, Collateral and Conditions (economic). The former refers to security and the later to external factors, say, business climate which plays a good part in deciding the prospects of the borrower’s business.
In order to obtain information in respect of all the C’s of the borrower, the lending banker will have to compile a report which is termed as “Credit Report” or “Status Report” or “confidential Report” or “Financial Report”, on the prospective borrower.
All the terms carry more or less the same meaning. The necessity of a complete credit report cannot be overemphasized, since it is the only barometer to judge about the feasibility of a proposal for advance.
Thus, to get a complete picture of the borrower’s creditworthiness, enquiries will have to be made regarding character, honesty, ability and financial soundness of the borrower.
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