11.administration of loan

8/13/2019 11.Administration of Loan

1/19

Administration of Loans

Chapter outline:

Loan Covenants

Red Flag/Warning signal

Loan recovery Techniques


2/19

Terms & Conditions of Loan Approval

Terms & Condition of loan may vary fromcustomer to another customer.

In accordance with banks lending criteria & loanpolicy.

Seven important elements.


3/19

Loan Covenant

Written agreement or promise usually underseal between borrower and bank for the amountof the loan.

Include terms & conditions of the loan,warranties, duties of each parties and certaincontrol and restrictions on the borrower.

Prepared by legal firm which are usually panel ofthe bank.

Need to be stamped duty.


4/19

Loan Covenant

A loan covenantis a condition in a commercial loan or bond

issue that requires the borrower to fulfill certain conditions or

which forbids the borrower from undertaking certain actions,

or which possibly restricts certain activities to circumstanceswhen other conditions are met.

Typically, violation of a covenant may result in a default on

the loan being declared, penalties being applied, or the loan

being called.

Covenants may also be waived, either temporarily or

permanently, usually at the sole discretion of the lender.


5/19

Purpose of Loan Covenant

Established legal relationship

Prevent misunderstanding

Certain control and restrictions

Clarifies the responsibility of the borrower

Give assurance to the borrower


6/19

Types of Covenants

COVENANTS

FINANCIAL

NON-FINANCIAL


7/19

Types of Covenants

Financial covenants

Refer to maintenance of specific ration

Common financial covenants used:

DEBT EQUITY RATIO,

LOAN LIFE COVER RATIO etc


8/19

Types of Covenants Non-financial covenants

Clause that requires the borrower to performcertain action

Ex: submission of periodical financialstatement, maintain a minimum gearing ratio

Affirmative covenant

Clause that restricts the borrower from doingcertain things

Ex: prohibition of mergers and acquisitionswithout bank approval.

Negative covenant

Clause that give the borrower information oncertain things.

Ex: action and penalties of default payment.Information covenant


9/19

Contents of Loan Agreement

Must contains the following:-

1. Date of the agreement

2. Name & address of the borrower and the bank.

3. Purpose of the loan

4. Amount of the loan

5. Period/duration of the loan

6. Repayment method

7. Rights of the bank to charge penalty on late payment

8. Interest charge on the loan

9. Types of security for the loan

10. Other terms & conditions


10/19

Legal Aspect of Lending

Loan agreement represents legal relationship between

borrower, bank and third parties if any.

In case of default or NPL legal action can be taken

against the borrower by the bank in accordance with

loan agreement.

Therefore, the loan agreement must be prepared

diligently.


11/19

NON PERFORMING LOAN (NPL) A loan classified as NPL when the principal or

interest is due and unpaid for 3 months or morefrom the first day of default.


12/19


13/19

6. Adequate information & valuation of the collateral.

7. Insurance coverage.

8. Inform the guarantor of his duty as a guarantor.

9. Notified the guarantor on the status of the loan

10. Disburse the loan once the perfection of the loan has

been done.

Legal Aspect of Loan Documentation


14/19

Perfection of Securities

Land National code 1965 Section

Share

Debentures

Guarantees

Motor Vehicles


15/19

Identification of Problems

(Warning Signal/Red Flag)

- Is the term used to describe the early symptoms or

warning signals of a loan prior to falling into repayment

default.


16/19


(Warning Signal/Red Flag)- Financial warning signal.

- Balance sheet

- Income statement

- Bank account statement

- Management warning signal.

- management skills unable to cope with the environment changes

- Regularly changing position of BOD


17/19


(Warning Signal/Red Flag)- Operational warning signal.

- Reducing profit and sales trend

- Changing demand and intensifying competition.

- General warning signal.

- More to natural disaster, can be combination of 3 signal

- Flood

- War, etc


18/19

Loan recovery Techniques

Stage 1 : Cooperative workout agreement

Stage 2 : Collateral liquidation

Stage 3 : Reducing debt to judgment

Stage 4 : Enforcement and collecting judgment

- Levi, garnishment, equity receivership & public sales.

Stage 5 : Bankruptcy


19/19

Judgment Against Problematic Borrower

An outright seizure of aborrowersproperty will be sold at a publicauction. The proceeds are used to settle debt and other legal claimsrelating to the judgment.

LEVY

The court may appoint a receiver to take control of the borrowersassets and try to get as much cash as possible out of the business to

repay the bank

EQUITY RECEIVERSHIP

The bank would require a court order to instruct the third partywithhold funds owed to debtor to forward the fund direct to thebank.

GARNISHMENT

When the market value of security charged is higher than theamount of debt owed the bank would apply for court order to sellthe charged asset to the public.

PUBLIC SALE

If borrower unable to pay the debt, court order on bankruptcy willbe applied. Voluntary bankruptcy is when debtor voluntary files aposition to relief from debt. While involuntary bankruptcy when the

debtor forced into bankruptcy by his creditor.

BANKRUPTCY

11.administration of loan

Documents