The document discusses credit analysis and credit ratings. Credit analysis is used to determine a company or individual's ability to repay debt by examining qualitative and quantitative factors like financial stability, payment history, amounts owed, and credit mix. For corporate loans, the 5 C's of credit analysis are often used: character, capacity, capital, conditions, and collateral. Credit ratings are assigned by agencies to indicate creditworthiness and risk of default. Higher ratings like AAA or AA indicate the highest safety while lower ratings like BB or B indicate higher risk.

2. • A valuation multiple is the ratio of firm value
or equity value to some aspect of the firm’s
economic activity, such as cash flow, sales, or
EBITDA. The table below lists the most
common multiples used to value firms,
together with the terminology that is used to
describe the multiple.

3. CREDIT ANALYSIS
• Credit analysis is the process of determining the ability of a
company or person to repay their debt obligations. In other words,
it is a process that determines a potential borrower’s credit
risk or default risk. It incorporates both qualitative and quantitative
factors. Credit analysis is used for companies that
issue bonds and stocks, as well as for individuals who take out loans
• Credit analysis is used by:
• Creditors to determine a corporation’s ability to pay back loans
• Creditors to determine an individual’s ability to pay back a loan
or mortgage
• Investors to determine a corporation’s financial stability

4. The 5 C’s of Credit Analysis
• For corporate loans, the 5 C’s of Credit are often used to determine credit
quality:
• Character
• Capacity
• Capital
• Conditions
• Collateral
•
• For individual loans, credit scores are used, which include:
• Payment history
• Amounts owed
• Length of credit history
• Credit mix
• New credit

5. The 5 C’s of Credit Analysis

6. The 5 C’s of Credit Analysis
• Character
• This is the part where the general impression of the protective borrower is analyzed. The lender forms a very subjective
opinion about the trustworthiness of the entity to repay the loan. Discrete inquiries, background, experience level, market
opinion, and various other sources can be a way to collect qualitative information and then an opinion can be formed,
whereby he can make a decision about the character of the entity.
• Capacity
• Capacity refers to the ability of the borrower to service the loan from the profits generated by his investments. This is
perhaps the most important of the five factors. The lender will calculate exactly how the repayment is supposed to take
place, cash flow from the business, the timing of repayment, probability of successful repayment of the loan, payment
history and such factors, are considered to arrive at the probable capacity of the entity to repay the loan.
• Capital
• Capital is the borrower’s own skin in the business. This is seen as proof of the borrower’s commitment to the business. This
is an indicator of how much the borrower is at risk if the business fails. Lenders expect a decent contribution from the
borrower’s own assets and personal financial guarantee to establish that they have committed their own funds before
asking for any funding. Good capital goes on to strengthen the trust between the lender and the borrower.
• Collateral (or Guarantees)
• Collateral is a form of security that the borrower provides to the lender, to appropriate the loan in case it is not repaid from
the returns as established at the time of availing the facility. Guarantees, on the other hand, are documents promising the
repayment of the loan from someone else (generally family member or friends), if the borrower fails to repay the loan.
Getting adequate collateral or guarantees as may deem fit to cover partly or wholly the loan amount bears huge
significance. This is a way to mitigate the default risk. Many times, Collateral security is also used to offset any distasteful
factors that may have come to the forefront during the assessment process.
• Conditions
• Conditions describe the purpose of the loan as well as the terms under which the facility is sanctioned. Purposes can be
Working capital, purchase of additional equipment, inventory, or for long term investment. The lender considers various
factors, such as macroeconomic conditions, currency positions, and industry health before putting forth the conditions for
the facility.

7. CREDIT ANALYSIS PROCESS
• Credit analysis is a process of drawing
conclusions from available data (both
quantitative and qualitative) regarding the
creditworthiness of an entity, and making
recommendations regarding the perceived
needs, and risks. Credit Analysis is also
concerned with the identification, evaluation,
and mitigation of risks associated with an
entity failing to meet financial commitments.

8. CREDIT ANALYSIS PROCESS

9. Credit Rating
• A credit rating is a quantitative method using statistical
models to assess creditworthiness based on the
information of the borrower. Most banking institutions
have their own rating mechanism.
• This is done to judge under which risk category the
borrower falls. This also helps in determining the term
and conditions and various models use multiple
quantitative and qualitative fields to judge the
borrower.
• Many banks also use external rating agencies such
as Moody’s, Fitch, S&P, etc. to rate borrowers, which
then forms an important basis for consideration of the
loan.

10. • A credit rating agency (CRA) is a company that rates
debtors on the basis of their ability to pay back their
interests and loan amount on time and the probability
of them defaulting. These agencies may also analyse
the creditworthiness of debt issuers and provide credit
ratings to only organisations and not individuals
consumers. The assessed entities may be companies,
special purpose entities, state governments, local
governmental bodies, non-profit organisations and
even countries. Individual customers are rated by
specialised agencies known as credit bureaus
that provide a credit score to every customer based on
his/her financial history.

11. • CRISIL stands for Credit Rating Information
Services of India Limited
• CARE - Credit Analysis and Research limited
• ICRA - Originally named as Investment
Information and Credit Rating Agency
• SMERA - Small and Medium Enterprises
Rating Agency of India
• ONICRA - ONICRA Credit Rating Agency

12. Rating
Description
CRISIL AAA
(Highest Safety)
Instruments with this rating are considered to have the highest degree of safety
regarding timely servicing of financial obligations. Such instruments carry lowest
credit risk.
CRISIL AA
(High Safety)
Instruments with this rating are considered to have high degree of safety
regarding timely servicing of financial obligations. Such instruments carry very
low credit risk.
CRISIL A
(Adequate Safety)
Instruments with this rating are considered to have adequate degree of safety
regarding timely servicing of financial obligations. Such instruments carry low
credit risk.
CRISIL BBB
(Moderate
Safety)
Instruments with this rating are considered to have moderate degree of safety
regarding timely servicing of financial obligations. Such instruments carry
moderate credit risk.
CRISIL BB
(Moderate Risk)
Instruments with this rating are considered to have moderate risk of default
regarding timely servicing of financial obligations.
CRISIL B Instruments with this rating are considered to have high risk of default regarding

13. MULTIPLE DISCRIMINANT ANALYSIS
(MDA)
• Edward I. Altman (1968) developed Z score model
in order to detect the financial health of
industrial units with a view to prevent the
industrial sickness.
• The model was developed basing on empirical
studies, to predict the sickness of a unit in
advance.
• The model is also called as ‘multiple discriminant
analysis (MDA)’. It is a linear analysis used to
develop with five variables.