Top Credit Analyst Interview Questions and Answers
Credit analysts facilitate credit risk managementCredit Risk ManagementCredit Risk Management is the process of mitigating the risk associated with each security in a portfolio. There are various ways to eliminate the potential risks posed by a market. by measuring the creditworthiness of the individual or a firm. Credit analysts are generally employed by banks, credit card companies, rating agencies, and Investment Companies.
Below are our top credit analyst interview questions.
#1 – What is Credit Analysis?
Credit AnalysisCredit AnalysisCredit analysis is the process of drawing conclusions about an entity's creditworthiness based on available data (both quantitative and qualitative) and making recommendations about perceived needs and risks. Credit analysis also involves identifying, assessing, and mitigating risks associated with an entity's failure to meet financial commitments. is the analysis and identification of risks wherein a potential for lending are observed by the banks. Banks perform both the qualitative as well as quantitative appraisal of their clients.
#2 – Explain the Process of Credit Analysis?
The below diagram sums up the overall Credit Analysis Process.
#3 – What are the 5Cs of Credit Analysis
- Character – This is a subjective opinion about the trustworthiness of the entity to repay the loan.
- Capacity – Most important of the 5 factors, Capacity relates to the ability of the borrower to service the loan from the profits generated by his investments.
- Capital – This means how much the borrower has contributed to the project (own skin in the game)
- Collateral (or Guarantees) – Security that the borrower provides to the lender to appropriate the loan in case it is not repaid from the returns as established at the time of availing the facility.
- Conditions – Purpose of the loan as well as the terms under which the facility is sanctioned.
#4 – What do you mean by interest coverage ratio?
This is one of the most important credit analyst interview questions. When a company takes debt, they need to pay interest. The interest coverage ratio shows the company how able they are in paying off their interest expenses. All we need to do is to divide EBIT (Earnings before interests & taxes) by interest expense. The higher the ratio better would be the company’s ability to pay off the interest expenses and vice-versa.
#5 – How to value a company?
There are many ways in which financial analysts can value a company. The most common methods of valuation are the discounted cash flowDiscounted Cash FlowDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance. (DCF) method and the relative valuation method. In the first method, we need to find out the free cash flow, and then based on that, we find out the present value of a business. In the second method, we look at other comparable companies and use their metrics and figures to come to a conclusion.
#6 – Is there a specific debt-capital ratio that Banks Target?
Since the debt-capital ratio can differ from industry to industry, there’s no reasonable debt-capital ratio.
- For start-ups, the debt would be pretty low or almost none. As a result, the debt-capital ratio for start-ups would be around 0-10%.
- But if you talk about small businesses, the debt-capital ratio would be a little higher, around 10-30%.
- And if you think about the banking or insurance industries, the debt would be too high. As a result, the debt-capital ratio would be around 70-90%. The debt-capital ratio is an important ratio, but many investors/analysts also use the debt-equity ratio.
#7 – What are the typical Credit Analysis Ratios?
You must expect this credit analyst interview question. There are a few top ratios that banks constantly use. The debt-equity ratio, interest coverage ratio, tangible net worth ratio, fixed charge coverage ratio, debt-EBITDA ratio, debt-capital ratio are the most common. Since these ratios can easily portray the financial health of businesses, these are the ones banks have to use the most.
#8 – What do credit rating agencies do?
Credit agencies help the market understand the creditworthiness of a business by looking at the outstanding debts. But blindly trusting the ratings of credit rating agencies wouldn’t be prudent. We need to look at the risk profile of each organization along with multiple credit agencies’ ratings to be sure about whether to offer a loan to that company or not.
#9 – How would you know whether you should lend to a company?
There are many things that I would look at.
- Firstly, look at all four financial statements for the last 5 years and analyze how the company has been doing financially.
- Then look at the total assetsThen Look At The Total AssetsTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equity and find out which assets can be used as collateral. And I will also get to know how the firm has been utilizing its assets.
- Thereafter, look at the cash inflow and outflow and would see whether the cash flow is enough to pay off the total debt plus interest expense.
- Also, validate the metrics like debt to capital ratio, debt to equity ratioDebt To Equity RatioThe debt to equity ratio is a representation of the company's capital structure that determines the proportion of external liabilities to the shareholders' equity. It helps the investors determine the organization's leverage position and risk level. , interest coverage ratio, debt to EBITDA.
- Validate all the metrics of the company are as per the parameters of the bank
- Finally, look at other qualitative factors that may reveal something completely different than the financial figures.
#10 – What is the difference between a debenture and a bond?
|DebenturesDebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer. have a more specific purpose for raising short-term capital. It is normally for meeting immediate expenses or pay for the expansion.||They are used by the Government and large Corporate for long-term expansionary plans.|
|They are not secured.||They are highly secured.|
|They can be issued for a short duration, which can be for less than a year.||Bonds are for a longer duration ranging from 5 years to 30 years.|
It can also be stated that ‘All debentures are bonds, but all bonds are not debentures.’
#11 – What is DSCR?
DSCR = Net Operating Income/Total Debt Service
DSCR ratioDSCR RatioDebt service coverage (DSCR) is the ratio of net operating income to total debt service that determines whether a company's net income is sufficient to cover its debt obligations. It is used to calculate the loanable amount to a corporation during commercial real estate lending. gives an idea of whether the company is capable of covering its debt-related obligations with the net operating income it generates.
- If DSCR<1, it means that the net operating incomeNet Operating IncomeNet Operating Income (NOI) is a measure of profitability representing the amount earned from its core operations by deducting operating expenses from operating revenue. It excludes non-operating costs such as loss on sale of a capital asset, interest, tax expenses. generated by the company is not enough to cover all the debt-related obligations of the company.
- If DSCR>1, it means that the company is generating enough operating income to cover all its debt-related obligations.
Q.12. How is the rating of a bond determined?
Ans: The rating of the bond indicates the credit quality and how successfully the bond can be repaid upon maturity. It is a critical component since the rating is displayed while issuing the bond and immediately creates an image on the quality of the instrument which is issued. The popular rating agencies are:
- Standard & Poor’s
- CRISILCRISILCRISIL is Credit Rating Information Services of India Limited, the global analytics business that services the financial markets and helps them function most transparently and efficiently. It believes in agile and innovation principles and provides data research and credit ratings.
The ratings are further classified as ‘AAA+,’ ‘ AA,’ ‘A,’ ‘BBB+,’ and so on depending on the bifurcation defined by the respective rating agency. The higher the rating, the more the probability of the issuer to repay the demand and lower will be the yield. This way, more money can be demanded since the issuer is stating the strength of their financial position. The ratings immediately give an idea to the investor about the position of the issuer.
#13 – What are the types of Credit Facilities for Companies?
There are two types of credit facilitiesTypes Of Credit FacilitiesThere are two types of credit facilities: short-term and long-term. A short-term credit facility is used to meet an organization's working capital needs, such as paying off creditors and bills. A long-term credit facility, on the other hand, is utilized to meet capital expenditure requirements, which are frequently financed by banks, private placements, and banks.:
- Short term loans, mainly for working capital needs. Short Term loansShort Term LoansShort-term loans are defined as borrowings undertaken for a short period to meet immediate monetary requirements. include overdraft, letter of credit, factoring, export credit, and more.
- Long-term loans are required for CapexCapexCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year. or acquisition. It includes bank loans, notes, mezzanine loansMezzanine LoansMezzanine financing is a type of financing that combines the characteristics of debt and equity financing by granting lenders the right to convert their loan into equity in the event of a default (only after other senior debts are paid off)., securitization, and bridge loansBridge LoansA bridge loan is a short-term financing option for homeowners looking to replace their current home and pay off their mortgage either by paying interest on a regular basis or by paying a lump sum interest when the loan is paid off..
#14 – How would you handle a long-term business client who wants a loan that your assessment says is not safe?
This is a tricky credit analyst interview question because this question tries to understand your client-servicing ability and, at the same time, how well you manage a conflicting situation. You need to answer this question in such a way that both of these conflicting interests can find a middle ground.
- First, since the client is important to business, you need to handle the request in a completely different way. In normal scenarios, you may reject the loan application because you would value your assessment, and at the same time, you need to think about the prospect of the bank. In this scenario, you wouldn’t reject the loan application but would find a middle ground.
- You may offer him a small loan that wouldn’t affect the bank, and for the rest of the loan, you would suggest a step-by-step method that will include the assessment. Since you can’t risk losing a multi-million dollar client, and at the same time, you cannot risk the future of the bank; I feel this is the best way to handle this situation.
#15 – What skills should a Credit Analyst have?
As a credit analyst, you may have many skills. But make sure that you share only those that you’re quite good at. If you mention something that you’re just learning, mention that too. Honesty is preferable than being found out that you don’t know something. Credit Analysts are detail-oriented and good with accounting and financial skillsAccounting And Financial SkillsAccounting Skills are the set of skills required to present business transactions comprising of financial and non-financial in the books of accounts as per prescribed Standards of Accounting (US GAAP, IFRS, Ind AS) and as a part of legal compliance and analysis of business outcome in an optimum way.. Also, they are excellent in Financial Modeling and forecasting in excel.
This has been a guide to Credit Analyst Interview Questions. Here we provide you with the list of Top Credit Analyst Interview Questions and answers with additional tips to crack the interview. You may also refer to the following interview guides to learn more –