Tips for loan: How does a bank rate the credit worthiness of an application?

Good article for myself and my readers~ Quoted from The Star Biz...

How does a bank rate the credit worthiness of an application?

AmBank (M) Bhd retail banking managing director Datuk Mohamed Azmi Mahmood says banks would generally assess five credit factors of an applicant.

These are character, capacity, capital, condition and collateral.

Azmi says character refers to the borrowers’ “willingness” to repay while capacity refers to their ability to generate adequate cashflow to repay the loan.

The remaining three factors – capital, condition and collateral – can be mitigated or compensated by the favourable economic climate and government-guaranteed schemes such as those under Credit Guarantee Corp (M) Bhd (CGC) and Syarikat Jaminan Pembiayaan Perniagaan Bhd, he says.

Azmi says borrowers must show good character, management competency and ability to repay existing loan obligations and other creditors.

“The lack of credit history for those applying for bank loans for the first time can be mitigated and compensated by relevant supporting documents such as updated financial accounts, bank statements and letter of award,” he says.

He says it is important that SMEs maintain proper book keeping to ensure that these documents are available when required, especially their audited financial accounts. “Loan applications from sectors or industries that the Government is promoting will also have a better chance of having their applications approved,” Azmi says.

He says SME loans make up a fourth of AmBank’s loan portfolio to corporates and enterprises last year.

Hong Leong Bank Bhd group managing director Yvonne Chia says loan applications that show good repayment capacity, acceptable business risks and account performance track records will be considered favourably.

She says financial assistance to SMEs comprised 40% of Hong Leong Bank’s business banking portfolio as at March 2010.

Meanwhile, HSBC Bank Malaysia Bhd deputy managing director (commercial banking and director sales) Thomas Varughese says one of the main reasons to reject an application is the lack of financial information that can show the sustainability or viability of a business.

For instance, he says, many SMEs do not pay enough attention to managing their financial position to portray a picture of success, or to show evidence of business continuity.

This makes it difficult to approve the application, Varughese says.

“Poor credit history of the SMEs, including that of its directors and/or guarantors is another issue,” he says.

Varughese says if the SMEs or their associated directors or guarantors have exhibited poor credit history, which is shown in missing payments on their existing loans including personal loans and credit cards, this will give a negative impression on the overall credit assessment.

To secure a loan, he says, SMEs should have a detailed business plan that explains why the loan is needed in the first place.

“It will also be helpful to provide information about the business (company or management profile), nature of the business and financial statements or accounts for at least the last two to three years,” he says.

Varughese says the provision of well-thought-through cashflow statements can also provide further evidence for the need for the financial assistance, adding that SMEs may visit HSBC website for guidance on how to apply for loans.

He says that as of last year, more than 22% of HSBC’s loan portfolio is SMEs loans.

Varughese says the bank is not keen to finance businesses that may be considered as unsustainable or destructive to the environment.

“At HSBC, we believe that being a sustainable business is not only about delivering profitable long-term growth, but also about maintaining a stable environment and building healthy, educated communities,” he says.