Seven-C’s of Creditworthiness

Seven-C’s of Creditworthiness

Creditworthiness is an evaluation of how deserving a loan contender is to get a loan sanctioned in his favor. The 7’Cs of Creditworthiness indicates the characteristic or features of creditworthiness.

Seven-C’s of creditworthiness:

(1) Character: It refers to the reputation of the prospective borrower in meeting obligation of the bank upon maturity. This includes certain moral and mental qualities of integrity, fairness, responsibility, temperance, trustworthiness, industry and the like credit character is a relative matter.

(2) Capacity: It refers to ability of the potential borrowers of repaying the debt when it falls due and is indicative of the borrower’s competency to utilize the loan profitably. This is a very important variable of credit analysis as the customer’s ability to repay is essentially dependent upon his earning capacity.

(3) Capital: It represents the general financial position of the potential borrowers firm with special emphasis on tangible net worth and profitability. The net worth figure in the business enterprise is the key factor that governs the amount of credit that would be made available to the borrower.

(4) Collateral: It is represents by assets that may be offered as pledge against loan extension. Collateral thus serves as a cushion or shock absorber if one or several of loan maturity. Collateral in the form of pledged assets serves to compensate for a deficiency in one or several of the three C’s.

(5) Condition: It implies economic and business conditions that affect the borrower’s ability to earn and repay debt and that are beyond the control of borrower. Economic conditions include all these factors, which have bearing on economic processes of production, distribution and consumption.

(6) Currency: What is the recent history and outlook of the primary currency in which the company will conduct its operations? Does the currency exhibit a history or likelihood of losing its value? The more stable the currency, the more attractive the loan request will be to a lender.

(7) Country: Does the borrower conduct a significant portion of its operations in a country with. a history of political instability? Is there the possibility of an ‘expropriation of the borrower’s assets due to a change in the country’s government? Is the country’s current political and legal system hostile to the interests of foreign countries? The more established the country’s government has been and the more its legal system has demonstrated a reverence for property rights and the rights of creditors, the more likely the bank will be willing to make the loan.