status report addresses the most important concern a lender has at the time of lending
money - the ability of a borrower to repay. Gone are
the days when this could be assured to an extent by brute force.
Nor can decisions be based on a hunch - an unfounded feeling that it
will be repaid.
The borrower may be honest, hardworking and conscientious. However, circumstances
beyond his control may force him to renege on his loan
repayments. To protect oneself, it is important to analyze the ability of a borrower to repay and evaluate the safeguards available.
This is what the status report attempts to do. It discusses all the crucial aspects of
a loan and concludes on the creditworthiness of the borrower. This
eliminates to a great extent any uncertainty and gives enough information
for a crucial decision to be made. We have often
come across persons speak glibly of leverage and profitability
without any idea about the borrower's cash flow or debt service
Lending is a very serious business
A decision to lend based on incomplete data will invariably lead to losses and can result,
as has happened, in the financial ruin of the lender.
This is where the status report assumes importance. It analyses the
borrower and environment within which he operates and
recommends whether a loan should be extended. The need
for such an analysis is not restricted only to disbursal of loans. A manufacturer may need to know the creditworthiness of
a supplier in order to be assured of his raw materials
and of a customer to be certain that his debt would be repaid.
Status reports are, therefore, required at all levels of corporate
activity. It must be acknowledged that a status report does not make a loan
safe. What it does is to bring into the readers' notice
the strengths and weaknesses of loan and thus affords a sound foundation for
a logical reason to be arrived at.
Concept To Know Client
The lender must know everything about the person to whom he lends
money - even the minutest details - as the fate of the
loan extended may depend upon it.
The Cost Of Credit
The cost of a bad credit is loss. This does not mean that one should not lend if it runs a risk. If that is so, no loans would ever be made. There
is always an element of risk in every loan. However,
considering the cost of credit the basis or reason for a loan must not be based solely on
* the income that the loan will yield over the period of the loan
* the belief that the purpose of the loan is commendable
* the fact that the company is known to the bank for many years.
These are not credit reasons, these are marketing reasons.
Considering the cost of credit, loans should be advanced only after a detailed status analysis has
been done, and it is reasonable to believe that the company/individual to whom the loan has been made can repay
It is imperative that statements made by the client are
The normal types of verification that are done are:
- the opinion of the bank where the borrower is known and the dealings the prospective borrower has had with
- the person's standing among his peers (according to them) and his
* customer checks - the opinion customers of the prospective
borrower have on him,
* on-site visits
to verify that the assets actually exist,
* verification of any other statement that could possibly be incorrect.
These verifications are important as it is on the basis of information
gathered that the decision to lend is taken. If the statements made
are incorrect the loan may not be repaid and the
security may be inadequate.
Structure & Ownership
The structure of a company and its ownership are of vital importance
in a credit decision.
The status report must state the ownership of a
company and the companies that make the group and their relationship with each
other. If the owner of the company has to depend on the income from the company to
meet his debt or other payments, it is unlikely
that he would restrict
his dividends. Furthermore, he may, in some other
manner, by increasing his own remuneration or by making the
company paying his personal expenditure, drain money from the company. This
can endanger the
credit. If a company is owned by a family, it can also be managed by members
of that family. Persons in positions of power may be there not due to their executive
ability but due to they being members of the
family (nepotism). This can over a period, damage the company.
A bad management can be totally disruptive. The
project may be excellent, the ideas may be superb, but an ineffective
management may destroy the project and bring it to doom. Similarly,
a good management can bring a company back on the road to prosperity from the brink of disaster by innovative strategy, aggressive marketing and cost
cutting. In short, the management of a company plays
a vital role in the performance of a company, and a status report that does not
examine the human aspect is incomplete.
Tool For Decision Making
The status report is a very powerful tool in the process of decision
- making and will minimise loan losses. It must however, be remembered that a status report cannot make
a bad loan good. For that matter, no report can. It can only highlight all the risks associated with the loan.
The function and importance of credit reporting
The principal purpose of credit reporting agency is the
protection of industry and commerce against unnecessary losses. On the other hand, positive commercial information induces the inquirer either to
continue an existing business relationship or to initiate new business. Viewed in this way, credit reporting agencies play a vital role in the development of trade and commerce. The need to obtain information on the reliability and financial status of a business partner prior to a transaction
being finalised or their investigation of an existing business relationship
is as old trade itself.
Eliminating Risks Through Proper Information
Times have changed but the need to verify the credit
standing of a business partner is as important as never before. The number of business has
increased tremendously. Furthermore, the growing mobility
of the business community as well as the rapid
expansion of trade beyond regional boundaries
render today's business less transparent. Also, traditional methods of payment are undergoing rapid change. This climate of increased uncertainty obliges today's decision maker to obtain timely and qualitative data on his business
The Function Of Credit Reporting Agencies
By the middle of the last century, updated lists of insolvent firms
or owners of bounced checks were published regularly in
trade journals. This development led to the formation of credit reporting agencies. Such companies
have been serving industry and trade ever since by
providing early warning signals on trouble ahead. In the course of their customary investigations, credit reporting
agencies pay attention to the financial aspects
and the payment record of a subject under review. Moreover, regular personal interviews are conducted to obtain in-depth qualitative information.
The resulting report becomes an important
instrument to judge the credit worthiness of a
Commercial Credit Reports Promote Economic Growth
Very often, this vital function goes unnoticed. Credit reports
enhance new business on national and international levels. Experience shows that credit
reports can be instrumental in building long-term
business relationships. For this very reason, questioning by
a credit report should not be regarded as painful intrusion in
a company's affairs. Rather, it should be viewed as
an opportunity for positive public relations. Moreover,
an experienced entrepreneur knows too well that refusing
to cooperate may be judged negatively by the user of a credit
In summary, credit reporting organisations have become a
vital element in today's landscape of industry and trade. Our product has
become an indispensable tool in corporate decision making. We are proud
of this role and contribution which is the result of mutual effort and good will of the parties involved.