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  Kaushal Kishore July 25, 2011 6:27

  I agree with Claudio. The credit history suggests confidence in the management capacity and character of the person. But, it would be always necessary to appraise the project / economic activity for which he is borrowing and the cash-flow to be generated must be estimated before lending to him. If cash-flow from the project or savings from other income source of the person are inadequate, there is risk of default. The issues raised by John like purpose of the loan and concentration risk are also other variant of risk..
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  Kaushal Kishore July 25, 2011 6:21

  The credit history suggests confidence in the management capacity and character of the person. But, it would be always necessary to appraise the project / economic activity for which he is borrowing and the cash-flow to be generated must be estimated before lending to him. If cash-flow from the project or savings from other income source of the person are inadequate, there is resk.
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  Claudio Pasqualin July 22, 2011 17:41

  Hi Oscar,

  In addition to the previous answers, I would also mention the need to assess the borrower's capacity to pay. In this case, regardless of the borrower being a company or an individual (but certainly respecting the different approaches to assess each situation), it is necessary to determine its capacity to meet the payments for this new and larger loan face its income, revenue, cash flow generation.

  Best,

  Claudio Pasqualin
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  James M. Mulcahy July 22, 2011 14:51

  Oscar,

   

  It all depends.  Assume it is a firm.  It is 5/3 larger than when it borrowed 300K?  Is it at least as efficient as it was before? What is the purpose of the loan?  Is it to expand current production, either working capital capital or fixed capital, or to do something new? What time period is it for?  What is the state of the economy, particularly its industry, absolutely and relative to where it was when it borrowed 300K? 

   

  These questions need to be addressed to determine credit risk.
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  John-Paul Fenwick July 22, 2011 14:32

  Hello Oscar,

   

  Interesting question!

  The way I would look at it is that the fact that he has presumably repaid the previous borrowings is only one (but an important one) of many questions that should be answered before providing credit. All the standard questions vis a vis ability to pay, security and or guarantee, purpose of borrowing, economic conditions etc still come into play. Also as a lender you have to look at how the new loan will fit in with your portfolio - for example will it breach your limits for single credits, industry or geography.

   

  regards

  John-Paul Fenwick