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Commercial Credit Analysis

Commercial credit analysis is defined to include not only analysis of loans in the conventional sense, but also certain loan substitutes and investments in debt and equity securities of corporations and unincorporated entities. The definition of "commercial credit analysis" does, however, exclude several classes of loans and investments that are not to be considered commercial credit. In defining a commercial loan, the loan with a modified meaning that incorporates close substitutes for loans, such as acceptances and other guarantees, financial leases, conditional sales contracts, repurchase agreements, and other similar arrangements would be included in the commercial credit analysis process.

Lenders are expected to follow sound risk management practices in the context of commercial credit analysis activities. Approval for expanding commercial lending beyond the limit of 5% of total assets depends on the company demonstrating compliance, not only with the criteria established with respect to commercial credit analysis, but with all provisions and regulations (including capital adequacy tests), and other industry guidelines and rulings for consistent commercial credit analysis.

Commercial credit analysis for many commercial lenders means utilizing certain commercial credit analysis criteria for applications for commercial credit approval. These commercial credit analysis criteria are consistent with those to be applied in approving similar requests from other types of regulated financial institution's commercial credit analysis.

Commercial credit analysis "considerations" may include…

• Requests from institutions with respect to increasing the approved limits on commercial lending or removing such limits based upon your commercial credit analysis parameters.
• Establish, maintain and communicate the criteria used to consider such requests in your commercial credit analysis. Upon review, provide written approvals where established criteria are met in the commercial credit analysis.
• Review, through the commercial credit analysis process, the commercial lending activities to ensure compliance with the established criteria.

Commercial credit analysis "criteria" may include…

• A review of the company's current position with respect to the existing authorized level of commercial lending activities, capital adequacy position and compliance with commercial credit analysis regulations, guidelines and rulings.
• A commercial credit analysis of past experience in credit management should include the volume of commercial lending activity undertaken in the past five years, statistics on non-performing loans, provisions, write-offs, renegotiated or reduced rate loans, arrears and other asset quality indicators for both commercial and other loans.
• A commercial credit analysis of annual earnings experience segmented by significant type of business activity (for example the categories used in regulatory reports) for the previous five year period.
• A comprehensive business plan indicating the strategic direction of commercial lending activities, markets and market share targets, forecasts and budgets should be included in the commercial credit analysis.

Commercial credit analysis "credit risk identification and management" is critical. This portion of the commercial credit analysis should include the following essential elements:

• Credit risk philosophy governing the extent to which the company is willing to assume credit risk.
• Role of the board of directors and management.
• General areas of credit in which an institution is prepared to extend credit, types of credit facilities, borrowers and geographic areas.
• Levels of delegation of credit approval and provisions or write-off authorities.
• A description of the commercial credit analysis includes evaluating credit proposals, credit documentation standards and credit collection processes.

Commercial credit analysis "credit monitoring and control practices" that are key in the commercial credit analysis include:

• Portfolio characteristics analysis to track single and associated groups of counter parties.
• Types of credit facilities, industries and geographic regions.

Critical to the commercial credit analysis is a credit rating system which defines risk rating criteria and rates the institution's risks accordingly, including the classification of credits as satisfactory, below standard or unsatisfactory.

Commercial credit analysis "credit review processes" that outline the regular monitoring of borrowers and applicable procedures for re-evaluation and re-rating of credits is essential.

Finally, the commercial credit analysis should include internal credit inspection and audit processes and procedures to ensure that credit processes are in compliance with the institution's policies.

WebEquity calculates a complete financial analysis on any loan type, from the simplest loan requests to the most complex agricultural and related small business credits utilizing the Farm Financial Standards Ratios and RMA Industry Comparisons. Credit bureau reports can be pulled from within the WebEquity system and lenders can include that information in their scoring and rating parameters. WebEquity also provides the Fair, Isaac LiquidCredit® analytic and decisioning service for small business lending, including the industry-leading Small Business Scoring Models^SM (SBSS^SM)functionality so lenders can quickly and confidently process loans up to $250,000 with little or no financial data.

Source: Commercial Credit Analysis