CREDIT WORTHINESS OF BORROWERS :
The business of sanctioning unsecured advances is comparatively more risky and needs special care and attention on the part of the banker. In the absence of a charge over any specific asset, the safety of advance depends upon the honesty and integrity of the borrower as much as upon the worth of his tangible assets. The banker has, therefore, to make proper enquiries not only about the borrower’s capacity to pay but also about his willingness to pay the amount. Though such enquiry is also necessary in case of a secured advance but its urgency is greater in case of an unsecured advance for obvious reasons.
The creditworthiness of a person means that he deserves a certain amount of credit, which may safely be granted to him. Such creditworthiness is judged by the banker on the basis of his (1) character, (2) capacity, and (3) capital.
1. Character: In assessing the creditworthiness of a person, the first consideration is that of the character of the person concerned. The word character implies and includes a number of personal characteristics of a person, e.g., his honesty, integrity, regularity and promptness in fulfilling his promises and repaying his dues, sense of responsibility, good habits and the reputation and goodwill which he enjoys in the eyes of others. If a person possesses all these qualities, without any doubt or suspicion in the minds of others, he possesses an excellent character and will be considered creditworthy by the banker.
2. Capacity: The success of an enterprise largely depends upon the ability, competence and experience of the entrepreneur. If the borrower possesses necessary technical skill, managerial ability and experience to run a particular industry or trade, success of such unit may be taken for granted (barring some unforeseen circumstances) and the banker will consider him a deserving case for granting an advance. The significance of this factor is now growing as the banks are willing to grant unsecured loans to technicians and competent persons on the basis of soundness of their business projects, irrespective of their own capital.
3. Capital: The importance attached by the banker to the adequacy of capital of the borrower is not without significance. Banks are the repositories of the public money and lend the borrowed money. The banker, therefore, does not lend money to an entrepreneur who does not have adequate funds of his own. In case of failure of the business enterprise, the banker will be able to realize his money if the borrower’s own capital is sufficient.
Though all the above-mentioned factors are important and taken into account by the banker at the time of assessing the creditworthiness of the borrower, their relative importance differs from banker to banker and from borrower to borrower. The consideration of security is now undergoing a change. Greater emphasis is being laid on the ability and competence of the borrower and soundness of his project. However, persons of doubtful integrity and without good character are not granted unsecured advances. Further, creditworthiness is a relative term. A person may be considered, on the basis of the above, creditworthy for a certain amount only and not more.