What is credit analysis?

Credit analysis is any process used for assessing the credit quality of a party through the analytical study of financial statements and other data, including payment history, reputation reports and credit ratings, typically taken over a period of years as well as a determination of the value of property serving as collateral.  Credit analysis is used for making credit decisions and serves as the basis for the assignment of the credit rating of prospective borrowers and lessees.  Standard credit analysis determines whether the cash flow of a prospective lessee is sufficient to service rental payments and other lessee obligations, such as insurance and maintenance. 

Modern credit risk management exploits advances in financial theory, vast amounts of data and advanced data processing technology to quantify credit default risk.  This allows for more accuracy in the measurement of credit risk and much more granular risk discrimination, which enables the pricing of credit arrangements to more accurately reflect the risk of the transactions and risk-based provisioning to be more fine-tuned.