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The borrowing
community continues to express serious concern about the prevailing
credit crunch and the seeming reluctance of banks to lend. It is argued
that bank managers have become so risk-averse that they would rather
invest in secured short-term securities rather than lending money to
borrowers that are badly in need of financing.

Indeed banks are
accused of looking for every reason not to give loans, which defeats
the primary purpose of their financial intermediation role, the very
reason for their existence.

In 2009, The
Central Bank of Nigeria (CBN) licensed three Credit Bureaux: CRC Credit
Bureau, Credit Registry, and XDL Credit Bureau to enable financial
institutions access information on borrowers.

In the absence of a
robust credit bureau infrastructure, banks relied primarily on
information provided by their customers, which made it possible for
“serial defaulters” to continue to gain access to credit from several
banks simultaneously without full disclosure of their financial
transactions and without the ability or intention to repay.

A credit bureau
collects and collates detailed financial data on individuals and
companies from public sources and lending institutions with whom they
have a borrowing relationship. It then makes this information available
on request to subscribers for the purposes of credit assessment and
scoring. By its very nature, the credit bureau infrastructure should,
as it develops, make the environment more conducive to lending; it
should reduce loan-processing time, enhance informed lending decisions,
and ultimately, reduce the level of non-performing loans.

Banks are more
conscious than ever in ensuring that they grant credit only to those
whom they believe have the intention, and indeed, the capacity to repay
such loans.

Before you consider
applying for a loan, it is important to understand what lenders look
for in arriving at their decision to extend or withhold credit. “The
Three Cs of Credit” – character, capacity and collateral are just some
of the considerations.

Character

Character, is the
most important of the C’s. A borrower of good character will make every
effort to fulfill his or her obligations as they fall due. Creditors
will take into account your current salary, credit history, and current
debt. They will also consider how often you borrow, whether you usually
settle your debt obligations and on time, and whether you live within
your means. Signs of stability such as how long you have lived at your
present address, whether you own or rent your home and the length of
your present employment are also important factors.

From your credit
history, personal background, and borrowing behaviour, a lender may
decide whether you possess the integrity, honesty and reliability to
repay your debts.

Capacity

Capacity refers to
your ability to repay a loan and how much debt you can comfortably
handle. The lender will look to see if you have been working
consistently in a job that is likely to provide enough income to
support your borrowing. Income streams are analysed along with any
other obligations that could interfere with repayment.

For example, if you
are asking for a loan that requires you to make a payment of N200, 000
each month, do you have enough income or assets to make the payment
along with your other monthly obligations?

Lenders use the
debt-to-income ratio to measure how likely you are to repay the loan.
They want to know what your monthly income is and any supplementary
income from bonuses, dividends or rental income. The debt-to-income
ratio is calculated by summing up all your existing monthly debt such
as your rent or mortgage payments, car loan payments, or credit card
payments, including the monthly payment for the item you are trying to
finance. This total number is then divided by your income. Most banks
would be uncomfortable if more than 35 percent to 40 percent of your
income is spent on debt servicing.

Most lenders have
stipulated minimum requirements for loan applications. The more you
earn in a year, the more qualified you are likely to be. But even if
you are a high income earner, if your debts are equally large, lenders
may hesitate to lend you more money.

Collateral

A creditor also
wants to know what collateral or assets you have, other than your
income. This will include your bank accounts, investments such as
stocks, mutual funds, bonds, property, and other assets. An asset-rich
borrower has a better chance of getting a loan as lenders feel more
secure in the fact that such assets can be liquidated should the
borrower fall into any financial difficulty.

There are several
reasons why an application might be declined. If your loan request is
turned down, ask the loan officer what actions you could take to
qualify in the future. Bear in mind that just because one lender turns
down your loan doesn’t mean another lender will do the same. Different
creditors may reach different conclusions based on the same set of
facts. Where one creditor may find you an acceptable risk, another may
adopt a more conservative stance and deny you a loan.

Your borrowing behaviour largely determines your credit worthiness.
Today, there is a great premium placed on this. It is expected that as
the credit bureau infrastructure becomes well established, responsible
borrowers will find it easier to access credit. It is thus important to
build a good credit history and repayment culture, always committing to
honour all your obligations as they fall due.