Everything about the Credit Analyst role
[Note: This article has been written after consultation with Credit analysts working in the following companies: AU Small Finance (MSME Analyst); Northern Trust (Credit Analyst); HSBC EDP (Analyst - BFSI); Hitachi (Credit Analysis of Debtors); ICRA (Associate Analyst); Axis Bank - SME Analyst]
The job of a credit analyst revolves around determining the creditworthiness of a product, where a product can be a large corporate or a small SME, or even a two wheeler. A typical task of a credit analyst includes: gathering info from clients, reading financials, financials & ratio analysis, risk analysis through statistical models and making credit recommendations.
Credit Analyst roles can prove to be a good entry point into core-finance roles for finance aspirants. But not every credit analyst role is the same, as the roles are very product-specific. One should always prefer roles in the following order of products: Large Corporate > Small corporates > SME Rating > Retail loans. A credit analyst gets to learn more research & transferable skills working on corporate products. Typically there are 4 different types of roles as a Credit Rating Analyst: Offshore credit ratings for KPOs, Captive Rating Units for MNC Banks, Corporate/SME Ratings for Indian Banks and Credit Rating Agencies. These are discussed below:
a. Offshore Captive Rating Department - MNC Banks like HSBC, Barclays, etc.
Here, the analyst will be working in the Indian office of an MNC bank and will be handling credit rating assignments for their US/Europe entity. As this is a middle office role learning gets very limited and the analyst will be focusing on a narrow field of credit analyst (generally only the evaluation part) as the final decision will be taken by the front office team. Nonetheless, as the Analyst will be working on corporate loans given to large multinational corporates he will get better exposure compared to working in an Indian Bank. His/her day to day activities will range from Sector/Industry analysis, Ratio analysis of the target entity, drafting credit reports, feeding requisite date into the bank's automated system and liaison with the front end team. In the MNC banks as a lot of work is system driven and is further departmentalized across different teams, it further limits the learning ability of an analyst. However, working under an MNC bank has some key positives like Brand name, excellent work life balance (40-50hrs per week), helping work culture and decent pay.
b. Credit Rating Agencies - CRISIL/CARE/ICRA/India Ratings
Here the Analyst will be generating Credit Ratings for Large/Mid-size Indian corporates. His typical assignment will be to rate a company that wants to take a Term/WC Loan from an Indian Bank or to review an existing rating of that corporation. The day to day responsibility will range from understanding the rationale behind funding requirement, Industry analysis, compare the company with Industry peers, ratio analysis, Interact with Bankers, Auditors & Management for external checks, draft credit report (50-100 pages) to be reviewed by the rating committee and publish rating rationale report (5-10 pages). During the initial few years, research exposure will be limited as research is generally referred from Industry research reports from another senior analyst. But it will be a good learning experience with some slogging in terms of work-life balance (~60hrs per week)
c. Corporate/SME Rating/Retail - Indian Banks (Axis, ICICI, HDFC, etc.)
As discussed earlier, Corporate Ratings should be preferred over SME ratings. But it is generally difficult to get into corporate ratings as a fresher. SME ratings are doing for various loan requirements like Working Capital loans, LAP loans, or Vehicle loans. The day-to-day activity for an analyst here ranges from extracting CIBIL scores of the promoters, bank statement reco, basic financial analysis and other banking related activities with limited research work. Corporate ratings are more research-oriented and an analyst can learn more transferable skills here. Initially, the analyst won't have the power to approve the loan proposal but only once he is promoted to credit manager after 3-5 years of work exp. These SME/Retail rating roles are to be avoided as it doesn’t involve monitoring of financial information and thus no research is involved.
Offshore Credit ratings for KPOs like Evalueserve, Aranca, SG Analytics, Kopal Amba, Sutherland
These are typically entry-level roles with limited learning opportunities as the Credit Analyst will be working as back-end support for the US/UK credit analyst team. Day to day responsibility revolved around Client Support, Periodic result analysis, excel data entry, and a bit of financial modeling. These roles are easier to get into because Debt Market in US/UK is more developed compared to Indian markets and also due to higher attritions in these profiles. Salary for an analyst with 0-1yr of experience in this KPOs will range around 4-5lpa.
Typical Interview Questions: Expect most of the technical questions to be around Ratio Analysis, Banking Terminologies & how to evaluate credit worthiness
Ratio Analysis (D/E Ratio, Debt Service Ratio, Liquidity Ratios, etc.)
Working Capital, Cash conversion cycle and Capital Budgeting (IRR, NPV, etc.); How D/E and WC requirements vary across sectors?
Banking terminologies like ALM, CASA, Bank Guarantee, Fund Based exposure, WC Limits, securitization, CIBIL, LTV, PSL, BOP, Commercial Banking, First Lien, Bridge Loans, etc;
Banking regulations like BASEL norms, LIBOR, Risk-Weighted Assets, NPAs, etc.
Speak about the business model of an Industry/company that you have audited on or have made a project on? Recent developments in that sector?
How are Credit Ratings derived? What are default grade ratings and other types of ratings? How do credit rating agencies function?
What parameters of Financial statement is used to evaluate creditworthiness of a company;
How to do a financial analysis of a company? What is a credit appraisal process; How to analyze the liquidity profile of a company?
How is the rating of a bond determined? Few question on India's debt capital market;
Product knowledge for the role you are applying - like for a role related to WC loans, you need to have a basic understanding of products like CC, OD, LC, LRD, etc.
Basic questions related to the Indian economy like CRR, SLR, GDP growth, Inflation Targeting, etc.
Few Basic questions on Ind-AS and few questions on accounting terminology (like Difference b/w operating & financial lease, difference b/w DEPS and BEPS, etc.)
Few basic questions on Valuations and treatment of M&A (like what is Enterprise Value)