Criteria for granting credit

One of the fundamental activities of the financial sector is the granting of credits. This activity constitutes for banking its main source of income but at the same time it is an important cause of risk due to possible non-payment or late payment of operations. From the banking field, the study of credit operations is part of its risk analysis and risk constitutes the essence of banking activity. Risk management is important for any company and for banking it is a necessity.

The credit policy is based on a global business strategy and assignment of objectives For each activity segment, the elements that are considered in the planning and budget of this policy are the following:

• Volume of loans to clients to be maintained on the entity's balance sheet based on its structure and the strategy of the segments chosen by the entity to finance.
• Selection of credit modalities with determination of markets, sectors, volumes and terms.
• Design of credit policy for clients according to type of product, prices, guarantees.
• Design of the risk analysis and study system for the credit granting policy.
• Design of control and monitoring systems for proven and ongoing risks.
• Design of recovery and litigation management systems.

There are various models for evaluate quantitatively and qualitatively credit risk.

Every financial institution has systems and processes through which it evaluates the credit risk for any operation with its clientele. 

Any credit operation is requested to cover a financing need where it is necessary that there be adequate coherence between the purpose, the amount requested and the repayment period. Although it should be noted that the most important aspect for the analysis of a credit operation by the financial entity will be the study of its capacity to generate resources (cash) to be able to face the repayment of the operation.

The credit granting systems are different for salaried/self-employed individuals and for companies.

In this document, we are going to discuss the process of management, analysis and granting of credits for individuals, whether they are salaried or self-employed.

1. Process of managing a credit operation

If the petitioner is a client of the financial institution, it already has a lot of information about the client based on: positions of their balances and movements in their accounts, income from their payroll (if they have it domiciled in the entity), direct debits under their charge, Previous experience if you already had a credit position, irregular positions and possible incidents (for example embargoes, etc.) if there were any, etc. Based on all this, the entity has already built a financial profile or scoring of the client. Currently, entities prefer to be more proactive by offering their clients pre-granted loans for a certain amount based on the client's financial profile.

It is obvious that your information analysis and collection system will be more exhaustive in the case of non-customers and/or more “reactive” financing requests.

a) Collection of external information (common to individuals and self-employed workers)

In addition to the internal information that the financial institution already has about its clients, it usually collects additional external information for example:

• Work life report provided by Social Security: it relates contribution dates and companies in which you have worked.
• Declaration of assets: document signed by the client in which he specifies the assets he owns as well as the debts involved and the list of income and expenses that determine his economic capacity.
• Accreditation of assets: documents that prove its ownership as well as the debts incurred. If you are a client, the entity will request the CIRBE (Risk Information Center of the Bank of Spain) of the client, this is a document prepared by the Bank of Spain in which all the debts that the client has are indicated. with the rest of the entities (If you are not yet a client, you will be asked to sign the CIRBE application so that the entity can request it). It is important not to hide these debts with other entities from the financial institution since it will know about it through CIRBE.
• Regarding current loans with other entities The last paid receipts will be requested to verify the client's debt and its coincidence with the CIRBE. The financial institution will also consult the ASNEF (National Association of Credit Financial Establishments), a file that includes people who have had late payments or non-payments, although it is important to analyze the amount and nature of said non-payment.
• Regarding the properties you own, it is necessary to present the Property Deeds as well as the last IBI (Real Estate Tax) receipt.
• Rental contracts, whether the client is the landlord (property owned) or the tenant. In the first case they will be an income for the client and in the second, an expense.
• In case of divorce or separation, the judicial separation ruling and the regulatory agreement must be presented, which provide information on the use and allocation of real estate, especially the habitual residence, as well as the economic benefits that must be collected or paid, aspects that directly influence the applicants' ability to pay.
• Other income or expenses which must be justified by documentation, bank statements to prove bank deposits, etc.

b) For individual employees

In the case of salaried individuals, the entity will also request:

• Payroll or pension sheet: Normally you will request the last three payslips or pension.
• Annual income tax return (Personal Income Tax).
• Work contract, especially in jobs with little seniority or temporary jobs.

c) For self-employed

In the case of self-employed individuals, the entity will also request:

• IAE registration (Economic Activities Tax).
• Self-employed payment: receipt of payment of Social Security contributions to verify both the registration and the completion of payments.
• Personal Income Tax (IRPF).
• Invoicing, Annual VAT Summary, and installment payments of VAT and Personal Income Tax of the current year. The latter allow us to know the number of workers and professionals who work for the company.
• Annual declaration of operations with third parties, where purchase or sale operations exceeding 3,000 euros are listed.
• In the case of an objective estimate, a private declaration of income and expenses which complements the personal income tax return.

2. Process of analysis and granting of a credit operation

Once all the information has been collected, the entity proceeds to analyze it to grant or not the requested credit.

Normally today, such analysis task is automated in the algorithm system that the entity owns and that is called “scoring”. 

In the case of employees, the system evaluates in a special way:

• The income available for reimbursements such as the difference between monthly net income, and recurring expenses and monthly payment commitments, as well as other aspects such as the age of the borrower.
• Income is determined from the payroll sheets and income tax returns. In the case of expenses, concepts such as food, rent, schools, compensatory pensions, etc. are analyzed, and of course the current loan installments in the amortization phase, as well as deferred payment installments for credit cards.
• As a general rule, the possibilities of maximum debt should be around the 30-35% of monthly income.

In the case of self-employed people and to analyze the self-employed person's repayment capacity must be taken into account, together with the necessary documentation, certain aspects and circumstances, especially when it is an activity that allows taxation by objective estimation of personal income tax-modules (Law 7/2012, of October 29), and in which case the declared amounts are not an exact reflection of reality, which is often difficult to justify.

In some cases and although the credit operation is viable Due to the purpose, amount, term and price, it may be that the financial institution has some final doubts about the ability to repay the credit and demands additional guarantees for example: mortgage on the home, the signature or endorsement of an additional guarantor, etc.

This article has been prepared by Fernando Moroy, president of the Madrid Chapter of the Business Angels Keiretsu Network of San Francisco. You can learn more about him on his LinkedIn profile.