Six Cs of Credit
Relevent for JAIIB PPB | CAIIB ABM | CCP Module A
Why It Matters in Branch:
The Six Cs are the structured framework for credit appraisal. Every credit proposal you assess at branch uses these six parameters, whether you recognise them by name or not.
SHORT NOTES
The Six Cs of Credit form the qualitative and quantitative framework for evaluating any credit proposal:
1. CHARACTER — The borrower’s willingness to repay. Assessed through:
- Credit history and past repayment track record
- CIBIL/credit bureau report
- Reputation in market, references from existing bankers
- Management track record in case of companies
Character is the most important C — a borrower with poor character may misuse even the best security.
2. CAPACITY — The borrower’s ability to repay from cash flows. Assessed through:
- Income, salary slips, ITR for individuals
- Business cash flows, DSCR (Debt Service Coverage Ratio) for businesses
- Working capital cycle analysis
3. CAPITAL — The borrower’s own stake in the business (Net Worth). Assessed through:
- Tangible Net Worth, Debt-Equity Ratio
- Higher own stake = lower bank risk = lower chance of wilful default
4. COLLATERAL — Security offered to the bank. Assessed through:
- Type of security: Primary (created by loan itself, e.g., hypothecated stock) vs Collateral (additional, e.g., property mortgage)
- Realisable value, marketability, third-party valuation
- Collateral is the last resort — never lend purely on collateral strength.
5. CONDITIONS — External environment affecting repayment. Assessed through:
- Industry conditions, economic cycle, sector risks
- Regulatory changes, GST impact, import/export policies affecting the business
- Purpose of loan and market for the end product
6. COMPLIANCE — Regulatory and legal compliance of the borrower. Assessed through:
- KYC compliance, AML screening
- Environmental clearances, statutory licences
- Adherence to RBI guidelines on exposure norms
BRANCH CONTEXT
✦ In practice, we bankers tend to give maximum weight to Collateral and Capacity and sometimes ignore Character. The worst NPAs I have seen in my career were from borrowers with excellent collateral but poor character(Willfull Default) — they simply refused to pay once the security was created. CIBIL checks and market enquiry before sanction are non-negotiable..
