Top Credit Analyst Interview Questions and Answers
Credit analysts facilitate credit risk management 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 Analysis 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 the quantitative appraisal of their clients.
#2 – Explain the Process of Credit Analysis?
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. 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. 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 discounted cash flow (DCF) method and the relative valuation method. In the first method, we need to find out the free cash flow and then on the basis of 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 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 little higher, around 10-30%.
- And if you think about 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 debt-equity ratio.
#7 – What are the typical Credit Analysis Ratios?
You must expect this credit analyst interview question. There are few top ratios that banks constantly use. 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 assets 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 ratio, 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 which may reveal something completely different than the financial figures.
#10 – What is the difference between a debenture and a bond?
| Debentures | Bonds |
| Debentures have a more specific purpose for raising short-term capital. It is normally for meeting immediate expenses or pay for 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 ratio gives an idea that 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 income 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 can the bond 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
- Moody’s
- FITCH
- CRISIL
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 he 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 facilities:
- Short term loans, mainly for working capital needs. Short Term loans include overdraft, letter of credit, factoring, export credit and more.
- Long-term loans, required for Capex or acquisition. It includes bank loans, notes, mezzanine loans, securitization and bridge loans.
#14 – How would you handle a long-term business client who wants a loan that your assessment says is not safe?
This is 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 the 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 which 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 skills. Also, they are excellent in Financial Modeling and forecasting in excel.
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