Capital

Understanding and
Raising
Unit-IV
 Credit Analysis
Definition:
Credit analysis is the process of evaluating a borrower's ability to repay a
loan or meet financial obligations. It helps lenders determine the risk associated
with lending money.

Purpose:
The main goal of credit analysis is to assess the creditworthiness of
individuals, businesses, or institutions before approving loans or credit. It
ensures that borrowers can repay their debts without defaulting, helping lenders
avoid financial losses.
 Key Players in Credit Analysis:
• Banks & Financial Institutions – Evaluate loan applications and assess credit
risk before approving personal, home, or business loans.

• Credit Rating Agencies – Organizations like CIBIL (India), Experian, and

Moody’s assign credit scores and ratings based on financial history.

• Businesses & Corporations – Analyze creditworthiness before extending

trade credit to customers or suppliers.

• Investors & Bondholders – Use credit analysis to assess the risk of investing
in corporate or government bonds.
Key Aspects of Credit Analysis:
• Income and Employment History

• Debt-to-Income Ratio (DTI)

• Credit History and Reports

• Assets and Liabilities

• Loan Purpose and Collateral (if any)

 Why Credit Analysis is
Important
• Helps financial institutions minimize the risk of loan defaults.

• Ensures that borrowers get loans at fair interest rates based on their

creditworthiness.

• Strengthens the overall financial system by promoting responsible lending.

1. For Lenders (Banks, Financial Institutions, Creditors)

• Minimizes Risk: Helps banks assess whether a borrower is capable of repaying the
loan, reducing the chances of loan defaults.

• Better Loan Decisions: Enables banks to set appropriate interest rates, loan
amounts, and repayment terms based on creditworthiness.

• Fraud Prevention: Helps detect fraudulent applications by analyzing credit history

and past financial behavior.

• ✅ Example: A bank uses credit analysis to decide whether to approve a business

loan. If the business has a strong credit history and stable income, the bank may
approve the loan with lower interest rates.
2. For Borrowers (Individuals, Businesses, Corporations)

• Access to Loans: A good credit score increases the chances of getting loans
approved.

• Lower Interest Rates: A high credit score leads to cheaper loans, saving money over
time.

• Higher Credit Limits: Banks may offer higher loan amounts to borrowers with good
repayment history.

• ✅ Example: A borrower with a CIBIL score of 800 may get a home loan at 7%
interest, while a borrower with a CIBIL score of 600 may be charged 9% interest or
even face loan rejection.
3. For the Economy

• Promotes Financial Stability: Ensures that loans are given to creditworthy

individuals and businesses, reducing bad debts in the financial system.

• Encourages Responsible Lending and Borrowing: Helps banks lend wisely and
prevents excessive debt accumulation.

• Boosts Economic Growth: Enables businesses to expand through proper

credit allocation, leading to job creation and economic development.

• ✅ Example: If banks lend recklessly without analyzing credit risk, loan defaults
may increase, leading to financial crises like the 2008 Global Financial Crisis.
 Credit Scoring
• Credit scoring quantifies credit analysis into a score—a numerical value that

represents the credit risk posed by an individual or business.

Popular Credit Scoring Models:

• FICO Score (Fair Isaac Corporation)

• VantageScore (by Equifax, Experian, TransUnion)

 FICO vs. VantageScore –
Comparison Table
Aspect FICO Score VantageScore
Score Range 300 – 850 300 – 850

Used By Most banks, lenders (widely used globally) Growing usage, popular in alternative lending

Minimum Credit
At least 6 months of credit history Can generate score with as little as 1 month
History
Late Payments Heavily penalized Heavily penalized, especially recent ones
Impact
Weighting of
Fixed component weights More flexible, with categories by influence
Components

Trending Data Use Does not consider recent trends Considers recent credit behavior trends

Popular in India? Rarely used No; India prefers bureau scores (CIBIL, etc.)
Component Weighting (Side-by-
Side)
Component FICO Weight VantageScore Weight (Influence)

Payment History 35% Extremely Influential

Credit Utilization 30% Highly Influential

Length of Credit History 15% Highly Influential

New Credit 10% Less Influential

Credit Mix 10% Less Influential

Total Debt Included above Moderately Influential

Available Credit Not standalone Less Influential

 Why VantageScore Uses
Relative Influence (Not Fixed
Percentages)
The main reason VantageScore uses relative influence categories instead of exact
percentage weights is to allow greater flexibility and personalization in how credit scores
are calculated.

1. Individualized Scoring

• VantageScore adapts its model to reflect each consumer's unique credit profile.

• Example: If someone has limited credit history, their "available credit" may be more
influential than for someone with a long credit record.
2. Flexibility in Modeling

• Relative influence allows VantageScore to adjust the importance of components

based on the data available.

• This dynamic approach leads to fairer scoring, especially for people with thin credit
files or non-traditional credit behavior.

3. Easier Model Updates

• Credit behaviors and market conditions evolve. VantageScore can adjust its influence
weights more fluidly without overhauling the model.

• For instance, during COVID-19, certain factors (like missed payments) may have been
treated with more nuance.
4. Incorporates Broader Data Sources

• VantageScore supports alternative data (e.g., telecom, utility, rental

payments).

• Using influence categories rather than fixed weights helps balance

traditional and alternative data more effectively.

5. Transparency & User Understanding

• Instead of overwhelming users with percentages, VantageScore simplifies

it into categories like “Highly Influential” or “Less Influential”, making it
more consumer-friendly.
 Use Case Example: New-to-
Credit Borrower
📘 Profile:

• Age: 24

• First credit card opened 6 months ago

• One EMI for a laptop (paid on time)

• Utilization: 40% of credit limit

• No missed payments, but very limited history

 Use Case Example: Experienced
Borrower with Minor Late
Payment
📘 Profile:

• Age: 45

• Credit history: 15 years

• 2 credit cards, 1 home loan, 1 car loan

• Missed one credit card payment 3 months ago

• Low utilization (15%)

 Popular Credit Scoring Models
in India
1. CIBIL Score (by TransUnion CIBIL)
• Range: 300 to 900
• Most widely used score by banks and NBFCs in India.
• Good Score: 750 and above
• Factors Considered:
• Repayment history
• Credit mix
• Credit utilization
• Credit inquiries
• Duration of credit history
2. Experian Credit Score
• Range: 300 to 900
• Experian is RBI-approved and growing in popularity.
• Good Score: 750 and above
• Often used for personal loans and credit card approvals.
• Known for data accuracy and regular updates.
3. Equifax Credit Score
• Range: 300 to 900
• Provides credit scores to individuals and analytics to businesses.
• Used by many banks and fintech companies for risk analysis.
4. CRIF High Mark Score
• Range: 300 to 900
• Particularly strong in rural and semi-urban lending segments.
• Used by microfinance institutions, NBFCs, and cooperative banks.
• Known for incorporating alternative credit data.
Data Analysis in Capital
Understanding and Raising

Data analysis enables FinTech companies to make informed, data-backed

decisions about their capital needs and fundraising strategies.

1. Financial Data Analysis
• Cash Flow Analysis: Tracks inflows and outflows to identify funding gaps or surplus.
• Runway Calculation: Estimates how long the company can operate before needing more
capital.
• Burn Rate Analysis: Measures how quickly a startup is spending money; critical for early-stage
funding.
• Break-even Analysis: Helps determine the point at which revenues will start covering costs.
• Tools: Excel, Python (Pandas), financial dashboards

2. Investor and Market Analytics

• Investor Segmentation: Clustering algorithms to group investors by stage, sector preference,
check size.
• Sentiment Analysis: Using NLP to analyze investor sentiment from emails, social media, or
pitch feedback.
• Funding Pattern Recognition: Analyzing historical funding data to find trends (e.g., which
sectors are hot).
• Tools: Python (Scikit-learn, NLTK), Tableau, Crunchbase API, Pitchbook
3. Valuation and Scenario Modeling
• Predictive Modeling: Forecasting valuations based on key metrics (revenue, user
growth, etc.).
• What-if Scenarios: Simulation of capital needs under different growth or risk
scenarios (e.g., using Monte Carlo simulations).
• Comparable Company Analysis: Uses data from peers to benchmark valuation.
• Tools: Python (NumPy, SciPy), R, financial databases

4. Risk and Compliance Data Analytics

• Liquidity Risk Analysis: Assesses whether the firm can meet short-term obligations.
• Capital Adequacy Stress Testing: For regulated FinTechs like neobanks or lending
platforms.
• Regulatory Data Reporting: Automates preparation of capital adequacy and solvency
reports.
• Tools: SQL, ETL pipelines, RegTech integrations
5. Data-Driven Fundraising Strategy

• Pitch Optimization: A/B testing different versions of investor decks and

tracking investor response.

• Campaign Performance Tracking: For crowdfunding/VC platforms, real-time

data is used to monitor interest, bounce rates, conversion.

• Deal Funnel Analytics: Tracks where investors drop off in the fundraising
process.

• Tools: Mixpanel, Google Analytics, campaign tracking software

 Focus Area Data Techniques Used Insights Gained

Cash Flow & Burn Analysis Time-series, forecasting Runway, optimal funding time

Investor Behavior Analysis Clustering, NLP, sentiment analysis Targeted investor engagement

Valuation Estimation Regression, scenario modeling Fair value estimation for funding
rounds

Market Benchmarking Data scraping, peer analysis Comparative insights, funding

strategy

Fundraising Funnel Tracking Event tracking, conversion analysis Improve pitch materials and
outreach
 Crowdfunding
• Crowdfunding is a method of raising small amounts of money from a large
number of people, typically via the internet, to fund a project, business, or
cause.

• Instead of seeking a large investment from a few individuals or institutions (like

venture capitalists), crowdfunding taps into the power of the crowd to gather
capital — often through platforms like Kickstarter, Indiegogo, GoFundMe, or
SeedInvest.
 Types of Crowdfunding
Type Description Examples

Reward-based Backers receive a product, service, or perk Kickstarter, Indiegogo

in return for their support

Equity-based Investors receive shares in the company SeedInvest, Crowdcube

Donation-based Supporters donate money without GoFundMe, Ketto

expecting anything in return

Debt-based (P2P Lenders earn interest as borrowers repay LendingClub, Faircent

Lending) with interest (peer-to-peer lending)
 Crowdfunding - How It Works
• Project/Startup Owner creates a campaign on a crowdfunding platform.

• Campaign includes: goal amount, duration, pitch video/story, reward tiers (if

applicable).

• Backers discover and fund projects, usually via digital payment methods.

• If successful (some platforms require reaching the goal), the funds are released

to the project owner.

 Crowdfunding in FinTech
In the FinTech ecosystem, crowdfunding is often digitally enabled, data-driven,

and highly regulated. Key innovations include:

• AI-based investor profiling

• Blockchain-enabled smart contracts for transparency

• Real-time analytics for campaign performance

• Micro-investment models for retail investors

✅ Advantages

• Access to capital without traditional financial institutions

• Validates market interest early

• Builds a community of early adopters or supporters

❌ Challenges

• High competition and risk of failure

• Requires strong digital marketing

• Regulatory hurdles (especially in equity crowdfunding)

 Crowdfunding vs. Traditional Fundraising
Traditional Fundraising (Angel Investors or Venture
Aspect Crowdfunding
Capitalists)
Source of Funds Large number of individuals (the crowd) Few high-net-worth individuals or investment firms

Platform Online platforms (Kickstarter, SeedInvest, etc.) Personal networks, investment meetings, pitch events

Speed Often faster if the campaign goes viral Slower due to due diligence and negotiation
Varies: donation/reward = no equity; equity =
Control & Equity Often gives up significant equity and control
shared
Validation Market-tested by public support Validated by expert investors’ confidence
Varies by country and type (equity crowdfunding
Regulation Heavily regulated but more structured
regulated)
Marketing Need High – success depends on public outreach Moderate – mostly relationship-based pitching

Investor Involvement Limited (mostly passive backers) Active involvement – mentoring, strategy, networking

Funding Certainty Less predictable; may not reach goal Higher chance if investors are convinced
Higher, due to equity dilution and terms set by
Cost of Capital Potentially lower (esp. donation/reward-based)
investors
✅ Crowdfunding is Ideal for:

• Early-stage startups validating a product idea

• Creative, tech, or consumer-focused products

• Founders who want to retain more control

✅ Traditional Fundraising is Ideal for:

• Startups requiring large capital

• Businesses in complex or regulated industries (e.g., FinTech, MedTech)

• Founders seeking mentorship and strategic guidance

 Equity-Based Models
• Equity-based models refer to raising capital by offering ownership (shares) in a company to investors in

exchange for funds.

• This is a core strategy used in startups, especially in FinTech, to raise substantial capital without taking on

debt.

• In equity-based models, a company gives up a percentage of ownership (equity) to raise money. This

helps improve cash flow without immediate repayment obligations, unlike debt. Investors earn returns

through dividends (if applicable) or capital gains when the company is acquired or goes public (IPO).
 Types of Equity-Based Capital Raising Models
Model Description Used By

Angel Investment Early-stage funding by individual wealthy investors Startups, seed-stage FinTechs

Investment from professional firms in exchange for

Venture Capital (VC) Growth-stage FinTechs
significant equity stakes

Retail investors invest small amounts via platforms for

Equity Crowdfunding Early to mid-stage startups
equity shares

Initial Public Offering (IPO) Public sale of shares on stock exchanges Mature FinTechs looking to scale

Debt-like instruments that convert to equity in future

SAFE/Convertible Notes Pre-seed and seed-stage startups
rounds
 Role of Data Analysis in Equity-Based Capital Models
1. Valuation Modeling
•Predict company value based on revenue, users, market trends.
•Common methods: DCF (Discounted Cash Flow), Comparable Companies, Pre/Post-money valuation.
2. Cap Table Management
•Analyze how equity is distributed among founders, investors, and employees.
•Plan dilution impact for future funding rounds.
•3. Investor Profiling & Targeting
•Use data to match with equity investors (sector interest, past deals, investment size).
•Predict likelihood of investment based on startup metrics.
4. Exit Forecasting
•Simulate M&A or IPO scenarios.
•Help investors understand ROI timelines and multiples.
5. Due Diligence Support
•Organize and analyze financials, customer acquisition cost (CAC), lifetime value (LTV), and churn.
✅ Advantages of Equity-Based Capital Raising

• No repayment pressure (unlike loans)

• Can raise large amounts

• Brings in strategic partners and advisors

❌ Challenges

• Dilution of ownership and control

• Legal and regulatory complexities

• High expectations from investors

 ICO (Initial Coin Offering)

• An Initial Coin Offering (ICO) is a fundraising method used primarily by blockchain startups

to raise capital by issuing and selling cryptocurrency tokens to investors.

• It is often compared to an IPO (Initial Public Offering), but instead of shares, an ICO offers

digital tokens that may have utility, governance rights, or appreciation value.
 How ICO Works – Step by Step
• Project Creation
• A startup develops a blockchain-based idea or platform.
• A whitepaper is published explaining the project, tokenomics, roadmap, and team.
• Token Development
• The company creates tokens (usually on Ethereum using ERC-20 standard).
• These tokens are pre-mined and assigned a total supply (e.g., 1 billion tokens).
• Public Sale Launch
• Tokens are offered to early investors in exchange for major cryptocurrencies like Bitcoin
(BTC) or Ethereum (ETH).
• Investors buy at a fixed or tiered price before the token is listed on public exchanges.
• Post-ICO Listing
• After the sale, tokens may be listed on exchanges where they can be traded.
• Price may increase based on demand, project success, or speculation.
 Key Features of ICO’s
Feature Description

Token Digital unit offered during the ICO (e.g., utility or security token)

ICOs usually set a soft cap (minimum target) and a hard cap
Fundraising Goal
(maximum limit)

Cryptocurrency Most ICOs accept ETH or BTC as payment

Decentralized Fundraising is typically peer-to-peer, without intermediaries

 ICO Pricing Models
Model Description Example

Fixed Pricing Tokens are sold at a constant price throughout the ICO 1 Token = $0.10

Early investors get tokens at a cheaper rate; price Tier 1: $0.08, Tier 2: $0.10,
Tiered Pricing increases in later stages Tier 3: $0.12

Price starts high and gradually drops until all tokens are
Dutch Auction Market-driven demand pricing
sold

Based on demand, token price increases with more

Dynamic Pricing Used in high-demand ICOs
investment
 ICO Compliance (Legal &
Regulatory)
• KYC/AML: Know Your Customer and Anti-Money Laundering checks must be enforced to
prevent illegal activities.

• Whitepaper Disclosure: Must clearly describe the project, tokenomics, team, risk factors,
and legal disclaimers.

• Securities Law: Many countries treat certain tokens as securities, requiring registration
with regulatory bodies.
• In the U.S., ICOs often must comply with SEC rules.

• In the EU, they may fall under MiFID II.

• Smart Contract Audits: Ensuring the ICO’s token distribution is secure and tamper-proof.
 Returns on ICO’s
✅ Potential Returns:
• High upside potential if the token gains utility or demand (e.g., Ethereum's
ICO price was ~$0.30, now > $2000+).
• Liquidity: Tokens are usually listed on crypto exchanges, allowing early exit for
investors.
❌ Risks:
• Speculation: Many tokens have no real utility, leading to pump-and-dump
schemes.
• Volatility: Prices can swing drastically based on market hype.
• Regulatory Crackdown: Can freeze or invalidate projects post-ICO.
• Failure Risk: A large number of ICO projects fail to deliver the promised
product.
 ICO Pricing in India
Model Description

Fixed Price Token is sold at a pre-set price (e.g., 1 token = ₹10)

Tiered Pricing Early backers get tokens cheaper (Phase 1 ₹8, Phase 2 ₹10, Phase 3 ₹12)

Dynamic Pricing Price adjusts based on real-time demand during the ICO

Dutch Auction Price decreases over time until all tokens are sold
 ICO Compliance in India
Area Compliance Need

SEBI Guidelines No formal SEBI regulation exists for ICOs, but securities tokens may fall
under its scope.

Company Law Companies must comply with the Companies Act (especially in fundraising
and disclosures).

RBI & Crypto Circulars RBI had banned crypto transactions in 2018 (lifted in 2020); but no clarity on
ICOs.

KYC/AML Platforms conducting ICOs must implement robust KYC and anti-money
laundering practices.

Income Tax Act ICO earnings are taxable under “income from other sources” or capital
gains.
 Smart Banking
• Smart Banking refers to the integration of advanced digital technologies like

AI, machine learning, blockchain, biometrics, and IoT into banking operations

to enhance customer experience, security, and operational efficiency.

• It moves beyond traditional banking to offer intelligent, real-time, and

personalized services, often through mobile apps, chatbots, and automated

systems.
 Key Concepts of Smart Banking
Component Description
Digital-First Approach Branchless banking via mobile and web apps

AI & ML Integration Personalized financial advice, fraud detection, credit scoring

Chatbots & Voice

24/7 customer service using natural language processing
Assistants

Secure, transparent transaction processing, especially for cross-

Blockchain
border transfers

Biometric Authentication Fingerprint, iris, or facial recognition for secure logins

Allow third-party fintech apps to access banking data (with

Open Banking APIs
consent)
 Implementation of Smart
Banking
1. Infrastructure Digitization

• Move from legacy systems to cloud-based infrastructure

• Use of core banking systems (CBS) for centralized data management

2. Omnichannel Banking Platforms

• Seamless user experience across mobile, web, ATMs, and smart kiosks

• Example: Unified Payment Interface (UPI) in India

3. AI-Powered Services

• Chatbots like HDFC’s EVA or ICICI’s iPal

• Robo-advisors for investment recommendations

4. Cybersecurity Enhancements

• Implementation of biometric verification, end-to-end encryption, firewalls,

and anomaly detection

5. Customer Analytics

• Leverage big data to understand behavior and offer personalized products

• Example: Customized loan offers, savings plans, or spending insights

6. Smart Branches & ATMs

• Self-service kiosks, interactive video tellers, and cash recyclers

Examples in India

Bank Smart Initiative

HDFC Bank EVA chatbot, AI fraud detection, voice banking

SBI YONO app, biometric ATMs, AI-based risk management

ICICI Bank iPal chatbot, smart lending, video KYC

Axis Bank Open banking APIs, AI-driven credit engines

Benefits of Smart Banking
• 24/7 accessibility

• Enhanced security

• Faster transactions

• Automated services

• Smarter decision-making for both banks and customers

Challenges in Implementation

• Data privacy concerns

• High initial investment

• Resistance to technology by traditional users

• Cybersecurity threats