Judgmental Credit Analysis

Reviewed by Sujaini | Updated on Aug 27, 2020

What is Judgmental Credit Analysis?

Judgmental credit analysis is a way of accepting or rejecting credit based on the lender's judgment and not on a particular credit scoring model. It entails evaluating the borrower's application and using prior experience dealing with similar applicants to regulate credit approval. This process avoids using any procedures or empirical processes to determine approvals.

Judgmental credit analysis is used by smaller banks. On the other hand, large banks have more automated credit procedures. Due to the number of applications they receive, smaller banks will use this analysis as it is not cost-effective for them to develop a credit scoring system or hire a third party to establish credit scores.

The judgmental credit analysis is exceptional in its method and is based on traditional standards of credit analysis, such as bank references, payment history, age, and other elements. These factors are scored and weighted to provide an overall credit score, which the credit issuers use.

What are the 5 Cs of Judgemental Credit Analysis?

The five Cs of judgemental credit analysis are as follows:

Character: This is the part where the nature and behaviour of the borrower are analysed. The lender forms a subjective opinion about the trustworthiness of the entity to repay the loan.

Capacity: Capacity refers to the ability of the borrower to repay the loan from the profits generated by his investments. This is maybe the most important of the five factors.

Capital: Capital is seen as a proof for the borrower's commitment to the business. This is considered as an indicator of the borrower's risk ratio if the business fails.

Collateral: Collateral or guarantee is a form of security that the customer provides to the lender in case he/she fails to repay the EMIs.

Conditions: Conditions refer to the purpose of taking the loan and the terms under which the facility is sanctioned.