Credit Assessment: The 5 Cs of Credit

The 5Cs of Credit that must be considered in lending are:

 (i) Character

The term “Character” implies credit characters related to the qualities of individuals which make him conscious of the debt obligations. These characters include the borrowers’ moral characters like honesty, integrity, sense of responsibility and trustworthiness. It is one of the basic cornerstones in assessing the risk-bearing ability of the borrower. Borrowers with highly rated credit character can withstand unforeseen events and save themselves insolvency. A borrower noted for timely repayment shows a reflection of an ideal credit character. Character is also correlated with the returns and repayment capacities of the borrowers.

(ii) Capacity

Shows the capacity of the borrower to pay his debts when they fall due. Since payments often depend in part on income, the capacities of borrowers to pay will depend on the income (cash flow) rather than on savings.

(iii) Capital

Capital refers to the equity or net worth of a farm business. It assures that funds are available to repay loans if character, capacity prove to be inadequate. Capital also represents one of the cornerstones for measuring the risk bearing ability of the borrower.

(iv) Condition

…of both the borrower and the overall economy e.g. consumer trend, economic predictions, environmental considerations etc. I signifies the financial conditions of the borrower which has direct relevance with the risk bearing ability as well.

(v) Collateral (security).

The borrower must have some form of security that can be used to repay the loan in case of default. The security may range from land tittle, car logbook, among other physical things that have value and can be quantified. Without security, it may be very difficult for the lender to get his money back when the borrower defaults payment

(v) Credit worthiness

Creditworthiness mostly relates to the credit history and the availability of security. With good credit history and availability of security, it is much easier to access loans.



Signoriello, Vincent J. (1991), Commercial Loan Practices and Operations, ISBN 978-1-55520-134-0