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Credit Appraisal is a process to ascertain the risks associated with the extention of the credit facility. It is generally carried by the financial institutions which are involved in providing financial funding to its customers. Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper evaluation of the customer is perfomed which measures the financial condition and the ability of the customer to repay back the loan in future. Generally the credit facilities are extented against the security know as collateral. But even though the loans are backed by the collateral, banks are normally interested in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascsertained to ensure the timely payment of the principal and the interest.

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Credit appraisals often depend on more than just numbers. They depend on the appraisers understanding and beliefs about the risk to the Bank and ability of the borrowing organization to pay back the loan. Good lenders understand the challenges of making accurate credit appraisals and embrace the knowledge, skills and motivation that they need to make good credit decisions.
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Confident corporate bankers. Improved credit decisions. Increased sales. Reduced financial loss.

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Credit Appraisal Techniques will teach your corporate lending staff how to break down the information given to them by a business and how to judge if the information is sufficient and accurate or if more information must be requested.

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This should cover the legal structure of company, i.e. is it public / private / listed. If listed then broker reports can be an additional source of information besides share price. Sole proprietorships / partnerships tend to be higher risk. Potential support can be provided by sister concerns, multinationals etc. While this can be a support it can also work as a disadvantage with possible diversion of funds to sister concerns, transfer pricing etc. which should thus be addressed.
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Purpose of facility Source of repayment Security Financial Analysis

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Following items should be noted when assessing management: Quality and depth of management, particularly the CEO. Experience, qualifications, and capability. Succession and back up plans. Management style i.e. conservative, centralized/ decentralized approach.
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 Career progression, training and development policies. Staffturnover/personnel policies. Training, motivation, morale, besides staff quality.

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The lending order should review all risks officer relating to the lending point wise along with the mitigants and justified why lending is warranted, i.e. can the risks be covered or are these acceptable risks. Each borrower will have different risk profiles and therefore it is important to ensure there are adequately understood and addressed.
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Written checkings from other lenders should be obtained. Trade/market checkings can be obtained from various sources e.g. suppliers, etc. Talking to suppliers and other market information can give updated input on the company's financial position, e.g. if company is delaying payment to suppliers this could indicate liquidity problems. Also checks should be made from the market how the company's product is selling in the market or if it suffers from quality problems - these items are important since they impact sales and ultimately cash flow.
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Again this is an important area which helps evaluate the risk / reward aspects of a transaction. It is important to earn an acceptable spread on a loan, and therefore to arrange necessary funding, to compensate for the credit risk. Apart from this the Bank should make an adequate return on the loan to help build the up net worth which is a cushion to absorb loan losses. The Bank should maximize return on assets not only through spread income but other non funds income such as commissions, exchange etc. which are generated from contingent risk and do not involve the use of Bank funds.
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Also there are few more techniques of credit appraisal,like - Gestation period, - Pay back period, - Past history, etc

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Credit Appraisal is the process by which a lender appraises the creditworthiness of the prospective borrower

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