Credit Analyst Interview Questions and Answers - 2

6. What process would you follow to decide if you should lend to a company or not?

Lending decision to a company has to go through the process for you to be satisfied that you’ve not overlooked anything in terms of figures.

The things that I would do are:

i. Study the financial statements of the company for last five years to understand its financial position.

ii. Look at the assets and see which of them can be used as collaterals.

iii. Look at the inflow and outflow of cash.

iv. Validate the ratios like Debt to capital, Debt to equity, Interest coverage, Debt to EBITDA etc. as per bank’s parameters.

v. After validating the quantitative values, also see the environmental factors and other qualitative values. Notice if they both tell the same story or a different one.

7. What is DSCR?

DSCR stands for Debt Service Coverage Ratio. It is an indicator if the company can cover its debt related obligations with its net operating income.

DSCR = Net operating income
               Total debt service
DSCR<1 implies that the net operating income of the company is not sufficient to take care of all the debt related obligations of the company.
DSCR>1 implies that the net operating income of the company is sufficient to take care of its debt-related obligations.

8. What is LIBOR rate?

LIBOR Rate stands for London Interbank Offered Rate.

It is a globally accepted benchmark interest rate at which banks in the international set up lend money to each other for short term loans.

This rate is calculated and published every day by Intercontinental Exchange.

It also affects the consumer loans in various countries around the world.

While LIBOR is accepted globally there are many regional interest rates that are popular across the globe. Some of them are:

i) EURIBOR - European Interbank Offered Rate
ii) TIBOR - Tokyo Interbank Offered Rate
iii) SHIBOR - Shanghai Interbank Offered Rate
iv) MIBOR - Mumbai Interbank Offered Rate

In addition to this, you should also be prepared to answer questions related to Treasury rate, CRR etc.

9. What is CDS?

CDS stands for Credit Default Swap. It is a financial derivative or contract that allows the investor to swap his credit risk with another investor, should the borrower default on the loan.

Buying a CDS from another investor needs the primary investor to pay them a premium for the contract period. It can be compared to buying an insurance policy.