Presentation Transcript

1. Lending and Credit Facilities

   ACT4231 Bank Management

   ACT4231 Bank Management
2. Learning objectives Understand the principles of good lending Know the importance of the 7 Cs in credit evaluation ACT4231 Bank Management
3. Principles of Good Lending Purpose of loan The amount of loan The duration of the loan The repayment of the loan Market stability Financial position Bank’s position Security Monitoring ACT4231 Bank Management
4. Purpose of loan Reflect the government policy against the use of radioactive materials or decision not allow the building of high-risk building on hill slopes Be consistent with the present activity purpose of expanding the present business e.g set up branches or expand to a new market credit officer must exercise caution if the loan is to enable the borrower to embark on a new venture in another industry. Is the loan for working capital or purchase of fixe assets? It is speculative? ACT4231 Bank Management
5. The amount of loan The amount of loan must be adequate. There is not point providing financing to a project if the borrower has only sufficient funds to start project but not enough to keep it going Is the basis of calculation correct? The borrower in arriving at his financing requirements would have made certain assumptions to arrive at his cashflow, and so forth. Are these assumptions correct and accurate or realistic? ACT4231 Bank Management
6. The duration of loan Should commensurate with the nature of the proposal The banker cannot realistically expect loan to be repaid within a short period of time if the project undertaken is not going to enough income in the short term. The longer the duration of the loan, the greater the risk, or the chance of foreseen circumstances occurring. ACT4231 Bank Management
7. The repayment of the loan Present income Is the present income adequate to service the loan repayment? Is the salary adequate to meet the monthly installment? Is the borrower dependent on overtime to service the loan? Future income For business loans, the repayment is usually from the revenue to be generated by the “project to be financed”. Is this revenue flow to be generated sufficient? Are the assumptions regarding the revenue flow realistic? Achievable? Too optimistic? Sale of asset For speculative loans, the repayment is usually from the sale of assets. For e.g share margin account the banker has to be certain that the borrower will sell assets and that the sales proceeds will be sufficient to repay the loan. if the borrower will not sell, the banker would then exercise its rights to force sell before the prices drop further resulting in the proceeds being sufficient to settle the loan. ACT4231 Bank Management
8. Know-how Does the borrower have to know-how (especially technically knowledge) to carry out the project? E.g a successful poultry farmer cannot apply his knowledge in farming to successful run a shipping company. Does the performance of the borrower show his ability to successfully carry out an expansion of the business? Does the borrower have the expertise to carry on an expanded business? What is the market reputation of the borrower? If the market reputation of the borrower is not good, he/she may not be able to increase his market share of the business. Any expansion plans may not result in any increase in sale or revenue. ACT4231 Bank Management
9. Market stability How stable is the demand for the borrower’s product? What is the borrower’s performance within the industry? The demand for basic necessities is more stable. The demand for luxury products is usually the first to feel the effect of any recession Is the borrower in a sunset or sunrise industry? A sunset industry is one that is past its maturity and is on the way out. E.g rubber industry in Malaysia In contrast, a sunrise industry is one on the ascent. E.g mobile or hand phone industry. ACT4231 Bank Management
10. Financial position What is the short-term financial position of the borrower? Can he stand a credit squeeze? What is the long-term position of the borrower? Has the borrower any long-term funding needs? Are these needs financed by short-term borrowings? What is the fund flow position of the company? ACT4231 Bank Management
11. Bank’s position Vis-a-vis the borrower or shareholder. Generally the borrower or shareholders must show their commitment or support for the project by contributing their venture capital. Vis-à-vis other bank. How much is the bank’s exposure to this borrower? How much are the other bank’s exposure to this borrower? If other banks are not lending to this borrower, why? Vis-à-vis the industry. What is the exposure of the bank in this particular industry? If the bank’s exposure in a particular industry is high, the bank may not want to underwrite the loan even though it may be a viable proposition. ACT4231 Bank Management
12. Security Is secondary in making a decision whether to underwrite a loan or not. The decision to lend should not be made on the strength of the security as the bank is not in the business to realize the security to pay off the loan. What is the security available or offered? Is it encumbered to another bank or party? It is adequate to meet the loan in the event of an auction or disposal? How easy is it to dispose of? ACT4231 Bank Management
13. CREDIT ANALYSIS ACT4231 Bank Management
14. Credit factors in evaluation Character Capacity Capital Condition Collateral Capability Collectivity ACT4231 Bank Management
15. Character Honesty – if a person is honest, he/she try his/her best to pay debt and will try to run away from responsibility. Reasonableness - when a reasonable person is faced with having his debt, he will be reasonable in meeting his responsibility and not be unreasonable as to avoid doing so, or claim that he/she is not liable to pay. Responsibility – A responsible person will face up to his/her responsibility and not run away from it. Correct Attitude – A person with correct attitude towards his debts will try his/her best to honour them when they are due. Virtuous – If a person possess these virtues, namely. Humbleness, fairness, patience and temperance, he/she is most likely to value his character and try to uphold his name by paying his debts. ACT4231 Bank Management
16. Capacity If the borrower is a natural person, is he is a minor? A minor does not have any legal capacity to borrow. A person must have attained the age of majority before he can either into a binding contract. If the borrower is a company, has it been properly incorporated? A pre-incorporated company has no legal standing and therefore any contract it enters into cannot be binding. Is the person a bankrupt? Bankrupt have no capacity to borrow. Winding-up order. If the company is being wound up, the banker should not lend to it. Does the M&A or the constitution or the by-law of the borrower allow the borrower to borrow? Some co-operatives or employee’s unions/clubs/societies or clan associations do not allow the director/officer bearers to borrow in the name of organisation. ACT4231 Bank Management
17. Capability (for individual) Salary/income – income must match lifestyle and “net surplus” must be adequate to meet his commitment. Wealth – A borrower may be fortunate to have well-to-do parents or he/she may have inherited a fortune. This wealth may give him another sources of income from his employment. Qualifications - The qualifications of borrower or his technical skills will determine the type of employment that he can get and the income from his employment. Business acumen(ability to understand n judge clearly) – if borrower is a business person, his business acumen would be important factor to determine success. Health – A person who healthy will be able to get employment compared to someone who sickly or who has a medical problem. Industriousness – A hard working person will generally find it easier to get a job and to hold on to it than someone who takes his job lightly. ACT4231 Bank Management
18. Capability (for business) Technical skills – the borrower must have technical skills to produce the goods. Raw materials – raw materials must be available to produce the goods. Business acumen – to strategise the business plan to capture the market. Aggressiveness – to push its sales, the borrower must display some degree of aggressiveness to capture the market. Judgement – to estimate the demand for its product. ACT4231 Bank Management
19. Capital Represent the borrower’s money that he put into projects. The amount of capital that he puts in reflects on his commitment in the project. This capital provides the borrower with the ability to absorb a certain amount of loss. A borrower who has not put in any of his money for the project can just walk away from the project when things are not going well. If the borrower is convinced of the viability of project, he/she should not hesitate to put his own money to invest in the project. ACT4231 Bank Management
20. Condition Economic condition What is the economic condition both nationally and globally. The economics outlook will affect demand for the borrower’s products. Is the global economy robust or are there signs of a downturn? Industry outlook - having looked at the national and global economic condition, the banker should also look at the particular industry that the borrower is in. - Is it a sunset or sunrise industry? What is the borrower’s position in the industry? Is it market leader? Government policy - The government will have certain policies which will have direct or indirect impact on the industry. For e.g. for the entertainment industry, a special license is require if the borrower wants to operate a casino. - Certain state government may impose a ban on certain types of public entertainment. ACT4231 Bank Management
21. Collectivity How easy would it be to collect the borrowing from “going concern” premises if the assumption made about the cash flow are out by say 10% or 20%? In other words, how resilient is the cash flow if the variables are varied. The borrowers/borrowing is put through a stress test environment. How much would be collected back in a “gone concern” premises? That is, if the borrower were to close down his business, or to be declared a bankrupt, or the company is to be liquidated, how much would the bank be able to recover? ACT4231 Bank Management
22. Collateral Refer to assets which may be charged or pledged to the bank as security for the loans. A range of assets can be pledged to the bank as security. However, the loan proposal must not be considered solely on the amount of the collateral offered. Where the proposal is bad, it should be rejected. No amount of security will make the proposal any better or acceptable. ACT4231 Bank Management
23. Collateral…continue How easy is it to place a charge/ownership claim on the asset? For landed property, this is quite easy. However, it may not be easy for items like furniture or stocks covered by debentures. Are the assets removable? Assets like motor vehicles, ship or machinery are movable and may not be easy to trace. How stable are the value of the assets? The value of some assets like shares may be volatile and need more monitoring than landed property, which is relatively more stable. Motor vehicles tend to depreciate rapidly and the resale value may be low. How easy is it to dispose of the collateral? Unquoted shares would be easy to dispose of, unlike quoted shares. ACT4231 Bank Management