Credit Appraisal Memo (CAM)

A Credit Appraisal Memo (CAM) for working capital assessment is a comprehensive internal document prepared by lenders to evaluate the financial health and creditworthiness of a business borrower. Its primary purpose is to justify the extension of credit facilities and determine the appropriate risk rating for the proposal.

Core Components of a Working Capital CAM

While structures vary by institution and policy, a robust CAM typically includes the following:

• Executive Summary: A concise overview of the proposal, including the type of facility requested (e.g., Cash Credit, Overdraft, Letter of Credit), amount, purpose, and the primary recommendation for approval.

• Borrower/Company Profile: Background on the entity, ownership/shareholding pattern, management expertise, and business operations.

• Financial Analysis:

  • Review of past performance and projected future financials.

  • Analysis of key financial statements (Profit & Loss, Balance Sheet).

  • Ratio Analysis: Evaluation of profitability, liquidity (e.g., Current Ratio), leverage (e.g., Debt-Equity Ratio), and coverage ratios.

• Working Capital Assessment:

  • Calculation of the working capital gap/requirement.

  • Analysis of the operating cycle (inventory turnover, receivable days, etc.).

  • Assessment based on standard methods (e.g., Turnover Method or Cash Budget Method as per RBI guidelines).

• Risk Assessment: Identification of potential risks (business, industry, financial, or regulatory) and corresponding mitigation strategies.

• Collateral & Security: Details of the assets offered as security, their current valuation, and insurance status.

• Credit/Due Diligence: Verification reports, such as reference checks with suppliers/customers, site visit reports, and credit bureau checks (e.g., CIBIL/CRILC).

• Terms and Conditions: Proposed pricing (interest rates), covenants, tenure, and any specific conditions for the sanction.

• Decision/Recommendation: The final risk rating assigned to the borrower and the formal justification for the credit decision by the analyst/credit committee.

Key Considerations

• Focus on Reality: The document should be fact-based rather than speculative. It must clearly answer: Why is the loan needed? How will it be repaid? What are the risks? What is the "Plan B"?

• Standardization: Many Indian banks follow the CMA (Credit Monitoring Analysis) format (Forms I to VI) as per Reserve Bank of India (RBI) guidelines to ensure consistent financial reporting.

• Review Process: The CAM serves as a living document; it is typically reviewed and renewed at least annually to assess if the borrower's financial strength and productivity remain sufficient for continued credit.

Summary: A Credit Appraisal Memo (CAM) is a vital bank document used to analyze a borrower's ability to repay working capital loans. It aggregates financial data, operational background, risk factors, and collateral details to facilitate an informed, standardized, and objective lending decision.