credit lending

7/28/2019 Credit Lending

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What is credit & its need ?

The type of credit facilities

Evaluation of Credit Facilities

Taking Decisions relating to credit

Importance of Quality Credit


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A contractual agreement in which a borrowerreceives something of value now and agreesto repay the lender at some later date.

Time

Borrower

Lender

Lender

Credit Period

$

$


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Consumer Lending Corporate /Commercial Lending

By way of

Direct advances i.e. Fund based

Indirect advances i.e. non fund based advances

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Loan ( Short Medium Long) Overdrafts

Letters of Credit, Revolving Loans & Acceptance,Shipping Guarantees

Export Finance Import Finance

Pledge Loans & Trust Receipts

Guarantee Facility

Leasing & hire purchase


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To bridge working capital requirements.

Interest is to be calculated daily, debited monthly.Renewed periodically.

Bank has no control over the usage of funds. Generally Used For?

Not used for ?


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Generally used to finance Capital Expenditurealthough not always. (Eg-: Fixed workingcapital requirements)

To be repaid over a an agreed period of time, i.e.

the outstanding gradually diminishes.

To be granted for specific purposes.

Long Term, Medium Term & Short Term.


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A contingent liability created by one bank toanother.

Commission based.

Mostly used for foreign trade & in dealingwith unknown parties. Acceptance facilities ( usance period)


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Revolving loans are granted to financeparticular trade or order cycles.

They are short term in nature and coincidewith the working capital cycle of a client. Examples ?

Importers

Traders : Buying & Selling.


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Export Bill Purchases and Export LoanFacilities. Export Bills submitted by the exporter which are

then purchased by the bank.

Export Loans are granted to facilitate the pre-shipment requirements ( packing credit loans).


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Finance against Bill Acceptance Finance against Imported Merchandise

Payment Against Documents

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Pledge Loans are advances made against thepledging of a certain item as security. Eitherin the total contol of the F/I or with dualcontrol between the borrower and the F/I.

In Trust Receipts the title ( ownership) to thegoods are surrendered to the F/I.


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A promise made by a bank to another bank,lender or counterparty to pay a liability ofthe borrower based on the outcome of aparticular event/activity.

The beneficiary is always a third party. Financial Guarantees

Bid Bonds

Advanced Payment Guarantees Performance Guarantees

Retention Guarantees.


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Advances made against post dated cheques &approved bills.

Commission Based, expensive to borrower ,risky to F/Is.


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A lease is a contract calling for the lessee (user) to pay thelessor (owner) for use of an asset. A finance lease is a commercial arrangement where: the lessee (customer or borrower) will select an asset

(equipment, vehicle, software); the lessor (finance company) will purchase that asset; the lessee will have use of that asset during the lease; the lessee will pay a series of rentals or instalments for the

use of that asset; the lessor will recover a large part or all of the cost of the

asset plus earn interest from the rentals paid by the lessee; the lessee has the option to acquire ownership of the asset

(e.g. paying the last rental)
http://en.wikipedia.org/wiki/Contracthttp://en.wiktionary.org/wiki/lesseehttp://en.wiktionary.org/wiki/lesseehttp://en.wikipedia.org/wiki/Contract


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A method of buying goods by way of makinginstalment payments over time.

Involves a down payment.

Rentals are paid on a periodical basis.


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Credit Evaluation


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Marketing new business

Appraisal & Preparation of credit Report Recommendation Acceptance & Completion of securities Granting / disbursement

Monitoring and recovery

Retention Or Litigation


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Existing & New. Goals of the Bank Vs. Needs of the customer.

Profit Vs. Risk.

Ability to ensure a proper service. Information Acquisition & Documentation

the first attack is half the battle


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Two possible risks prior to a creditaccommodation : Default due to failure

Willful default.

50% of your total risk is mitigated byidentifying a potential willful defaulter.


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Credit Appraisal Process

Background & Management Analysis

Financial Analysis.

The demand Vs. Need.

Viability of the business Capacity to repay.

Market Analysis, Industry Analysis. Previous Track Record ECIB & Data Check, informal sources.

Risk mitigants

Adequacy of Collateral Security

Pricing and special conditions


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The nature of business. The History Product Range. Subsidiaries & Related Parties Present Banking Facilities.


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Who the key people? ( owners & management) Their backgrounds.

Educational

Social

Industry experience

Financial

Any other important disclosures eg: relatedparties, known addictions.


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The two key factors for business survival:

Profitability

Solvency

Profitability is important to measure theviability/practicality of pursing thebusiness.

The solvency of a business is importantbecause it looks at the ability of thebusiness in meeting its financial obligations


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The nature of advance requested.-Understanding the Various Types of Advances.

The size of the advance requested.

What are the implications of an improperfacility?

Inability to complete the project or carry out business. Inability to face volatilities. Hampers growth, loss of confidence. Excessive debt service burden. Loss of Efficiency. Over confidence.


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Income Source Income Amount

Income Consistency

Income Continuity Sensitivity Analysis

Cash Flow Statement & DSCR Calculation


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Position of the Borrower in the market(SWOT). The present standing of the business.

The existing market share (local /Global).

Competitors / barriers to entry.

What differentiates the client from the rest.

The industry outlook The government support

General Industry.

Identifying Sunshine industries.


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Previous Repayment Patterns.

CIB Reports.

Status Reports from other banks. D & B for foreign parties.

Informal Sources.


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Should be Liquid. Stability of Value & Durability

Identification.

Standardization


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Cash

Government Securities

Letter of Guarantee

Life Insurance Policies

Share Certificates

Immovable Items Land, Building & Fixed Machinery. Moveable Items- machinery, vehicles

Lease Hold Rights.

Stocks & Book Debts.

Trust Receipts & Pledged Items.

Promissory Notes. Personal & Corporate Guarantees.


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Inhernt/ Internal qualities of your client. Eg:-

Additional Collateral.

Excess Production Capacity.

Experience & Contacts. Management & Financial Stability.

Diverse Range of Products.


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The loan should be priced based on theamount of Risk the bank takes.

Special Conditions should be incorporated to

mitigate possible risks. Cash Build Ups.

Periodical stock statements/ visits.

Your Recommendations


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It is important to follow up and ensure thecompletion of security soon.

Avoid any changes that may affect your approvedproposal.

To avoid the client from leaving you. Reputational Risk


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Either way swift action is required.

This is what frames the future.


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Provisioning on Profits.

Affects the Image of the Bank Negatively:Reputational Risk which may lead to otherrisks.


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CCCPARTS- Character, Capital, Capability,Purpose, Amount, Repayment Terms andSecurity

PARSER Person, Amount, Repayment,

Security, Expediency, Remuneration

CAMPARI - Character, Ability, Margin, Purpose,Amount, Repayment , Insurance


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Evident Repayment Capacity.

Quality Collateral.

High Integrity or Previous Track Record

(unblemished trust) Pressure?


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C - Character C - Capacity C - Capital C - Collateral C - Conditions


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The lender will form a subjective opinion as towhether or not the borrower is sufficientlytrustworthy to repay the loan or generate a returnon funds invested in your company. The

educational background and experience inbusiness and industry of the borrower will bereviewed. The quality of the borrowers referencesand the background and experience levels of themanagement and employees of the borrowersbusiness also will be taken into consideration.


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to repay is the most critical of the five factors. Thelender will want to know exactly how theprospective borrower intends to repay the loan.The lender will consider the cash flow from the

business, the timing of the repayment, and theprobability of successful repayment of the loan.Payment history on existing credit relationships --personal or commercial -- is considered anindicator of future payment performance. Lendersalso want to know about the borrowers contingentsources of repayment.


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It is the money the borrower has personallyinvested in the business and is an indication of howmuch the borrower has at risk should the businessfail. Lenders expect borrowers to have contributed

from their own assets and to have undertakenpersonal financial risk to establish the businessbefore asking them to commit any funding.


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Collateral or guarantees are additional forms ofsecurity to be obtained from the borrower. Giving alender collateral means, pledge an asset of theborrower, such as land, building, machinery etc, to

the lender with the agreement that it will be therepayment source in case the borrower cant repaythe loan. A guarantee, on the other hand, is when a3rd party signs a guarantee document promising torepay the loan if the borrower can't. Lenders attime try to secure themselves with both the aboveoptions.


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It focuses on the intended purpose of the loan. Willthe money be used for working capital, additionalequipment, or inventory? The lender also willconsider the local economic climate and conditions

both within the borrowers industry and in otherindustries that could affect his business.


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Credit application form duly perfected (Everysubsequent request should be followed by a writtenrequest from the client)

Company profile nature of business, products,

Registration documents (form 13/20 & 40 duly certified ),M & A , key people

Borrowers Audited financial statements & the latestmanagement financials

Declaration of facilities with other Financial institutions

Visit Report


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Early warning signals can be identified from

Early Management Warning Signals.

Sales Returns ( quality issues).

Staff Morale. Market & Industry Failures

Receivable aging

Early banking warning signals


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Cheque returns

Regular Temporary accommodation requests

Delaying repayments

Operate over the approved limits Personal drawings

Heavy reliance on short term debt

Frequent change of business etc


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Lending is an art, You must understand theneed of the client and the need of the Bank

No Risk No Profit Your decisions should bebased on striking the balance between thesetwo.

End of the day it should be a win winsituation for both the client and the bank.


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Collateral is only a spare wheel.

Quality of your loan portfolio is more

important than volume of the loan portfolio.

Lending is only the start.


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The F/I are accountable for every cent thatis lent. The money lent is not your own!

Never be in a hurry to lend, because adefaulter will never be in a hurry to repay.

The regulator is there to help & guide you.It is your duty to support the stability of thefinancial system.


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Purpose: To use financial statements to evaluate an

organisations Financial performance Financial position.

To have a means of comparative analysis acrosstime in terms of: Intracompany basis (within the company itself) Intercompany basis (between companies) Industry Averages (against that particular industrys

averages)

To apply analytical tools and techniques tofinancial statements to obtain useful information toaid decision making.


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Financial statement analysis involvesanalysing the information provided in thefinancial statements to: Provide information about the organisations:

Past performance Present condition

Future performance

Assess the organisations: Earnings in terms of power, persistence, quality and

growth Solvency


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Requires that you: Understand the nature of the industry in which the

organisation works. This is an industry factor.

Understand that the overall state of the economymay also have an impact on the performance of theorganisation.

Financial statement analysis is more than justplaying with numbers; it involves obtaining a

broader picture of the organisation in order toevaluate appropriately how that organisation isperforming


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To perform an effective financial statementanalysis, you need to be aware of theorganisations: business strategy objectives annual report and other documents like articles

about the organisation in newspapers and businessreviews.

These are called individual organisational factors.


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The dates and duration of the financial statements being

compared should be the same. If not, the effects ofseasonality may cause erroneous conclusions to be drawn.

The accounts to be compared should have been prepared

on the same bases. Different treatment of stocks ordepreciations or asset valuations will distort the results.

In order to judge the overall performance of the firm agroup of ratios, as opposed to just one or two should beused. In order to identify trends at least three years of

ratios are normally required.


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Balance Sheet, Income Statement /P&L, CashFlow

Liquidity Analysis give a picture of a company's short term financial situation or

solvency.

Operational/Turnover Ratios show how efficient a company's operations and how

well it is using its assets.

Leverage/Capital Structure Ratios show the quantum of debt in a company's

capital structure.

Profitability & Performance Analysis use margin analysis and show the return on

sales and capital employed.


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Working capital management is importantas it signals the firms ability to meet shortterm debt obligations.

Working Capital = Current Assets CurrentLiabilities

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = Quick Assets / Current Liabilities


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Efficiency of asset usage

How well assets are used to generate revenues(income) will impact on the overall profitability ofthe business.

Debtors Turnover Ratio = Net Credit Sales /

Average Debtors

Average Collection Ratio = Months (days) ina Year / Debtors Turnover

Inventory Turnover Ratio = Cost of GoodsSold / Average Inventory


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Volume Improvement Reduction

Return

Sales Growth = Change in sales / previous years sales * 100

Gross Profit Margin = Gross Profit/ sales * 100

Net Profit Margin = Net Profit / sales * 100

Return on Capital Employed= (EBIT / Capital Employed) * 100

Return on equity = (Net profit after taxes) /Shareholders'equity *100

EPS = Net Profits Available to Equity Holders / Number ofOrdinary Shares Outstanding


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Measures the amount of risk for the businessin terms of debt gearing.

Interest Coverage Ratio = EBIT/ Interest Expense

Debt Service Cover Ratio =

PAT + Depr. + Annual Interest on Long Term Loans & Liabilities

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Annual interest on Long Term Loans & Liabilities + Annual Installments payable on Long

Term Loans & Liabilities

Debt to Equity Ratio = Short Term Debt + Long Term Debt / TotalShareholders Equity

Changes in Equity, Fixed Assets & Long Term Debt.


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Activity 2


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Building financial backgrounds Account Turnover.

Monthly Transactions.

Tax Returns.


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