Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Judgmental Credit Analysis

What it is:

Judgmental credit analysis occurs when a banker approves or denies a credit application based on his or her experience with similar projects rather than the applicant's creditworthiness.
 

How it works (Example):

Let's say Company XYZ needs to borrow $1 million to lease a new factory. It calls John Doe at Bank ABC about getting a loan. John just got burned on lending $500,000 to another company for factory space, so he denies Company XYZ's loan request because he doesn't want to lose any more money on factory loans. John has conducted a judgmental credit analysis.

Why it Matters:

Lending is a complicated business, and creditworthiness is often a large part of determining whether a business or individual gets a loan. In turn, credit scores and credit reporting are crucial.

However, when a lender already has a relationship with the borrower (let's say Company XYZ already has its cash accounts at Bank ABC, which generate tens of thousands of dollars a year in revenue for the bank) or when a lender wants to "get into" certain business sectors or lending areas for reasons unrelated to the borrower, lenders may approve or deny credit even when the borrower's credit scores indicate otherwise.