CRACKTARGET · FINANCE & REGULATORY EXAM LIBRARY · Updated 26 October 2026

Credit analysis is not a collection of ratios: it is a judgement about the borrower, purpose, operating cash flows, repayment and downside risk. This guide includes numericals for Bank SO, IIFCL, NaBFID and allied finance examinations.

Credit appraisal in seven stages

Stage	Key question	Evidence
Borrower	Who controls the entity?	KYC, ownership, governance, past conduct
Purpose	Why are funds needed?	End use, working cycle or capital expenditure
Performance	Are reported profits genuine and repeatable?	Audited accounts, tax data, bank statements
Repayment	Can free cash meet principal and interest?	CFADS, DSCR, sensitivities
Structure	What facility, tenor and margin fit?	Cash cycle, repayment profile
Security	What mitigates loss if things go wrong?	Guarantees, collateral, legal due diligence
Monitoring	What triggers corrective action?	Covenants, drawing power, early warnings

The five Cs: Character (conduct), Capacity (repayment cash flow), Capital (equity support), Collateral (secondary security) and Conditions (industry and macroeconomic risk). Good underwriting tests all five without treating collateral as a substitute for viability.

Formula sheet with interpretation

Metric	Formula	Exam caution
Current ratio	Current assets / current liabilities	Quality of receivables and inventory matters
Quick ratio	(Cash + eligible short-term receivables + other liquid assets) / current liabilities	Exclude slow inventory; use consistent definitions
Debt-to-equity	Interest-bearing debt / equity	Definition should be explicit and comparable
Interest coverage	EBIT / interest expense (basic version)	Does not directly include principal repayments
DSCR	Cash flow available for debt service / (principal + interest due)	Below 1× indicates cash shortfall for period
Receivable days	Average trade receivables / credit sales × 365	High days may imply collection stress
Inventory days	Average inventory / COGS × 365	Review obsolescence and seasonality
Cash conversion cycle	Inventory days + receivable days − payable days	Approximate net operating funding days

MPBF: textbook history versus contemporary lending

Maximum Permissible Bank Finance (MPBF) under classical Tandon-style questions is an important historical framework. Do not claim that a 1.33 current ratio or one MPBF formula is a universal, binding current RBI rule. RBI guidance permits appropriate working-capital assessment methods, subject to the applicable directions and bank policy. Read RBI working-capital guidance and guidance on drawing power.

Three fully solved numerical cases

Case 1 — DSCR and sensitivity

Cash flow available for debt service (CFADS) is ₹15 crore. Interest due is ₹4 crore and principal due ₹8 crore. DSCR = 15/(4+8) = 1.25×. If CFADS falls 20% to ₹12 crore with debt service unchanged, DSCR becomes exactly 1.00×. A single base-case ratio hides downside vulnerability.

Case 2 — operating cycle and funding

Inventory days = 70, receivable days = 55 and payable days = 35. Cash conversion cycle = 70 + 55 − 35 = 90 days. At average daily operating cash cost of ₹2 lakh, estimated cycle funding is 90 × ₹2 lakh = ₹1.80 crore. Treat this as a rough model and adjust for seasonality, cash buffers and actual margins.

Case 3 — traditional projected turnover method

Projected turnover is ₹10 crore. Under a specified traditional educational example of 25%-of-turnover working-capital need, assessed requirement is ₹2.50 crore; borrower contribution of 5% of turnover is ₹0.50 crore, leaving ₹2.00 crore as an illustrative bank component. These historical percentages are not a guarantee of eligibility or sanction.

Credit warning signs

Reported profits rise but operating cash flow remains persistently negative.
Receivables increase much faster than sales; ageing worsens or related-party balances surge.
Inventory assumptions change or write-downs are repeatedly deferred.
Frequent ad hoc limits, cheque returns or interest servicing through new borrowing.
Unexplained promoter withdrawals or weak governance and disclosure.
Currency mismatch, major cost overrun or a stressed off-taker on a project loan.