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Credit Analyst Interview Questions and Answers

Article bySayantan Mukhopadhyay
Reviewed byDheeraj Vaidya, CFA, FRM

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.read more 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.read more 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.

Credit Analysis Process

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For eg:
Source: Credit Analyst Interview Questions and Answers (wallstreetmojo.com)

#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.read more (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.

#10 –  What is the difference between a debenture and a bond?

DebenturesBonds
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.read more 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.read more gives an idea of whether the company is capable of covering its debt-related obligations with the net operating income it generates.

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:

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.read more:

#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.read more. 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 –

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Comments

  1. Nokuthula says

    This was very insightful thank you

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