The Six Cs of Credit Appraisal
Each C is a question, and each question has evidence on the file. Here is how a credit officer works through them.
Credit appraisal asks one question: will this borrower repay this loan on these terms? The Cs of credit break that question into parts a credit officer can check one at a time, each against documents on the file.
The IIBF CCP syllabus lists "Six Cs" under credit appraisal but does not name them. Five appear in every source: character, capacity, capital, collateral and conditions. The sixth varies by text. Some use cash flow, some creditworthiness, and one framework lists seven with both. Learn the five firmly and know the two extras.
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The Cs and What Each One Checks
Character
What it asks
Is the borrower honest and willing to repay?
Main evidence on the file
Credit information report, CRILC, wilful defaulter and suit-filed lists, other bankers' opinion
Capacity
What it asks
Can the business generate the cash to repay?
Main evidence on the file
Last 3 years' audited accounts, projections, DSCR
Capital
What it asks
How much of the borrower's own money is at stake?
Main evidence on the file
Net worth, promoter contribution, debt-equity ratio
Collateral
What it asks
What can the bank recover if repayment fails?
Main evidence on the file
Title search report, valuation report, CERSAI search
Conditions
What it asks
What outside factors could hurt repayment?
Main evidence on the file
Industry outlook, regulation, input prices, customer concentration
Cash flow (sixth C in some texts)
What it asks
Is cash coming in steadily and on time?
Main evidence on the file
Bank statements for 6 to 12 months, cash flow statement
Creditworthiness (in the seven-C list)
What it asks
Is the entity legally and statutorily in order?
Main evidence on the file
Constitution documents, ROC search, tax and GST compliance
| C | What it asks | Main evidence on the file |
|---|---|---|
| Character | Is the borrower honest and willing to repay? | Credit information report, CRILC, wilful defaulter and suit-filed lists, other bankers' opinion |
| Capacity | Can the business generate the cash to repay? | Last 3 years' audited accounts, projections, DSCR |
| Capital | How much of the borrower's own money is at stake? | Net worth, promoter contribution, debt-equity ratio |
| Collateral | What can the bank recover if repayment fails? | Title search report, valuation report, CERSAI search |
| Conditions | What outside factors could hurt repayment? | Industry outlook, regulation, input prices, customer concentration |
| Cash flow (sixth C in some texts) | Is cash coming in steadily and on time? | Bank statements for 6 to 12 months, cash flow statement |
| Creditworthiness (in the seven-C list) | Is the entity legally and statutorily in order? | Constitution documents, ROC search, tax and GST compliance |
Walking a Proposal Through the Cs
A manufacturing firm asks for a ₹10 crore term loan for new machinery. Illustrative figures.
- 1
Character first
Pull commercial and consumer credit reports for the firm and each promoter, check CRILC and the wilful defaulter list, and look at days past due and any SMA history with existing lenders. If the firm banks elsewhere, get that bank's confidential opinion and ask why it is moving. One wilful default record can end the appraisal here.
- 2
Capacity: can the project service the debt?
Study three years of audited accounts and the projections. The core test is the debt service coverage ratio: cash available for debt service divided by the year's principal plus interest. Benchmarks vary by bank; sources in the 1.5 to 2 range are common for term loans. A DSCR below 1 means the year's cash does not cover the year's repayment.
- 3
Capital: is there skin in the game?
The promoter must bring a share of the project cost from their own unencumbered funds. Sources quote 15% to 25% depending on the facility and bank. At 25%, a ₹13.33 crore project needs ₹3.33 crore from the promoter for a ₹10 crore loan. At 20%, a ₹12.5 crore project needs ₹2.5 crore.
- 4
Collateral: the fallback
The machinery itself is primary security, by hypothecation. Any collateral, such as a factory property, needs a title search covering at least 30 years, an independent valuation and a CERSAI search to confirm no earlier charge. Collateral cushions a loss; it does not make a weak proposal acceptable.
- 5
Conditions: the world around the borrower
Ask what happens to repayment if raw material costs rise, demand slows, a regulation changes, or the firm's largest customer leaves. A firm selling most of its output to one buyer carries concentration risk even with good ratios.
- 6
Cash flow: does the money really move?
Reconcile credits in the bank statement with turnover in GST returns (GSTR-3B), and check for inward cheque returns. Frequent bounces are a sign of liquidity stress. Then visit the unit: confirm the business exists, the machines run and stocks match the books.
Capacity Usually Carries the Most Weight
Each lender weights the Cs its own way, but most place the greatest weight on capacity, because repayment comes from cash flow, not from selling security. Character decides whether the borrower will pay; capacity decides whether they can.
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Qualitative and Quantitative Cs
- check_circleMostly qualitative: character and conditions. Judged from track record, references, interviews and the industry outlook. Conditions is often called the most subjective C.
- check_circleMostly quantitative: capacity (DSCR, cash accruals), capital (net worth, promoter share, debt-equity) and collateral (value, plus how easily it can be sold).
- check_circleCredit reports turn part of character into a number, which is why lenders lean on repayment history and scores.
How the IIBF Exam Tests This
- check_circleMatch the C to its evidence: a CIBIL or CRILC check is character; DSCR is capacity; promoter contribution is capital; a title search or CERSAI search is collateral.
- check_circleSituation questions: "borrower has a large property but projected cash flows do not cover instalments" fails capacity, not collateral.
- check_circleWillingness vs ability: character is willingness, capacity is ability. Options that swap them are wrong.
- check_circleIf a list of Cs includes something like "competition" or "cost", it is the odd one out; the accepted extras are cash flow and creditworthiness.
FAQs
What are the six Cs of credit?expand_more
Character, capacity, capital, collateral and conditions, plus a sixth that differs by text, usually cash flow or creditworthiness. IIBF's syllabus names "Six Cs" without listing them, so learn the five core Cs and both extras.
Which C of credit is the most important?expand_more
Most lenders weight capacity the most, since loans are repaid from cash flow. Character comes close behind: a borrower who can pay but will not is still a bad loan.
How is capacity measured in credit appraisal?expand_more
For businesses, mainly through the debt service coverage ratio and cash accruals from audited and projected accounts. For individuals, through income, job stability and existing debt payments.
Is collateral enough to sanction a loan?expand_more
No. Collateral is a fallback if repayment fails. A proposal must first stand on character and capacity.
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