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Banks’ credit operations have developed rapidly with changes in the domestic business environment, commercial activities, and social needs. They are also the main source of profits for banks. The construction industry is an integrated business where a wide range of tasks from production to manufacturing and services are performed on a contract basis. It is also an industry with high integration of capital, skills, and labor. For operators in this industry, the number of projects in hand is susceptible to external factors, such as the real estate market, the government’s implementation of public construction plans, and changes in regulations, and also affects their financial status and business stability. In recent years, there have been drastic changes in both the domestic and international economic environments. The budgets for domestic public constructions are shrinking year by year, and market competition is increasingly intense. Besides, large construction projects are characterized by a large scale, huge investments, a long cycle, high technical difficulty, involvement of multiple parties, high risk, and a complicated relationship of interaction. From banks’ standpoint, it is imperative to adhere to the basic principles of credit (i.e. safety, fluidity, public welfare, profitability, and growth), assess the risks of the industry, collaterals, the borrower, and its business operations, follow the 5 P’s for credit review, and find a balance between risks and profits when offering a loan to businesses in the construction industry.
This study uses L Construction Company’s loan application case in Y Bank as an example to analyze the determining factors for approval of a loan to this company. Results show that not only changes in the financial aspect, factors in the non-financial aspect should also be considered in the evaluation of credit risks of a company in the construction industry. These non-financial factors include changes in the business environment and the government policy, political influence, whether the company’s professional abilities meet the contract requirements, and whether the construction period is too long. To reduce the credit risks in this industry, banks are suggested to reinforce the following mechanisms:
1.Perform customer due diligence;
2.Pay attention to the attainability of each source of repayment;
3.Establish a risk pooling mechanism;
4.Implement post-loan management.
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