Loans are sanctioned based on the loan application. Loan cases are not processed merely by observing the loan amount or the purposes mentioned in the loan application form. Rather, bank examines whether the purposes of loan are acceptable to banks.
This consideration is made to ensure the return of the loan amount. In the following chart, we may find the usual sources of credit information.
16 Sources of Credit Information
Internal Sources of Credit Information
Application
Bankers may get information from the client by analyzing the filled-in credit application form. It will be the first source of information for a new client.
Interview
A banker can also get information by interviewing or directly contacting the client and asking them the reasons for seeking credit, reviewing the present financial position, types and nature of the collateral, etc., that are proposed to be offered.
Financial Statements
Any business firm must submit its financial statements to take a bank loan. From the financial statements, banks can get information regarding the trend of the firm’s financial position.
Bank’s Own Record
If the client had previous transactions with the bank, ban tan g information from the documents/ records kept in the bank. The related information may be the practice of repaying the loan, the amount of deposit in the bank, the nature of banking activities, etc.
External Sources of Credit Information
Banks can also collect various information from external sources. These sources are:
Government or regulatory authorities
Government sets and establishes rules and regulations for controlling the country’s business activities. Records of such offices of the government may serve as the source of required information:
Income tax office
If a bank wants information regarding the tax payment by the potential borrower, it may seek information from the income tax. In such returns amount, sources of income & expenditures are shown to assess the tax liability of the particular assessee(s).
Government Gazette
Banks can get periodic information if any government contact from the published gazette by government.
Records from the other government office
Bank can also get other information regarding the potential borrower from relevant other government offices. The loan applicant had to move around for business connections.
Registrar of joint-stock companies
Companies must get permission from the registrar of joint-stock companies to commence.
Apart from this, public limited companies must also submit their annual financial statements duly audited to the registrar of joint-stock companies. The bank may seek information about the client from the joint-stock registrar’s office if necessary.
Other Sources
Inspection
Bank may send one of its officials to visit physically and inspect the potential borrower’s working place or factory. By inspecting and physically investigating, bankers may collect necessary client information.
Market report
Banks may analyze the market potentiality of the client’s business from the report of the stock. The trends of share prices/dividend payouts, etc., help banks know the success of the borrower’s venture, which ultimately ensures repayment of the loan and interest.
Credit information bureau
CIB preserves the loan information of large business institutions or people who frequently approach loans. CIB can be another source of information for banks.
Newspaper
Bank may carefully analyze newspaper reports on the commercial/ financial page to find information regarding the potential borrower.
Sometimes, exceptionally strong/ weak information regarding the clients may be published in newspapers. This information may affect the creditworthiness of the client positively or negatively.
Audit firm
Audit firms can also provide necessary information to the bank if that auditor audited the potential borrower’s financial statements.
Other bank’s report
Banks may collect information from other banks where the potential borrower maintained transactions earlier.
From these previous banks of a potential borrower, the bank can get information regarding the track record of the Ioan repayment practice of the borrower.
Trade Journal
This is another source of credit information. Important information about selected firms/ companies is regularly published. Bank may check such reports while analyzing the creditworthiness of a loan applicant.
Trade Directory
Trade directory can also collect information regarding the potential borrower.
