Judgmental Credit Analysis

Judgmental Credit Analysis

Judgmental credit analysis is a qualitative approach to credit risk assessment that relies on the analyst's judgment to evaluate the creditworthiness of a borrower. This approach is often used for small businesses and other borrowers that do not have a long credit history or access to public financial information.

The analyst will typically begin by gathering information about the borrower's financial situation, including their business history, financial statements, and credit history. They will then use this information to assess the borrower's ability to repay the loan and their willingness to do so.

In addition to financial factors, the analyst may also consider other factors, such as the borrower's industry, management team, and competitive environment. The analyst will then make a judgment about the borrower's creditworthiness and recommend a credit decision.

Judgmental credit analysis is a subjective process, and different analysts may reach different conclusions about the same borrower. However, this approach can be a valuable tool for lenders who need to make credit decisions on borrowers with limited financial information.

Benefits of Judgmental Credit Analysis

There are several benefits to using judgmental credit analysis, including:

• It can be used for borrowers with limited financial information.
• It can be used to consider qualitative factors, such as the borrower's industry, management team, and competitive environment.
• It can be a more flexible approach than other credit risk assessment methods.

Drawbacks of Judgmental Credit Analysis

The main drawback of judgmental credit analysis is that it is subjective and can lead to different conclusions about the same borrower. Additionally, this approach can be time-consuming and costly.

Conclusion

Judgmental credit analysis is a valuable tool for lenders who need to make credit decisions on borrowers with limited financial information. However, it is important to be aware of the limitations of this approach and to use it in conjunction with other credit risk assessment methods.