Role of Credit InvestigatorPresented by:

Muhammad AliPresented to:

Sir Khalid Sultan AnjumIBF, BZU, Multan

Presented By:

Muhammad AliRoll No 40

Credit Credit is a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.

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Possible funding Channels for Business

CommercialBanks

Company

Shareholders(equity offering)

Partners/owners

Leasingcompanies; equipment

vendors

Government-subsidized

credit

InternationalDevelopmentAssistance

• Environmental revolving loan funds

• Development banks & credit schemes

• Ex/Im finance guarantee schemes

Internal sourcesCommercialsources

Public/ODA sources

CashreservesCredit cooperatives/

unions

Customerfirms

Commercial BanksAcquire funds by receiving money from

savers: savings accounts, deposit accounts, etc.

Provide funds to borrowers through term loans, lines of credit, bonds, etc

The interest payments on loans are used to pay interest to depositors & are a primary source of profit for the bank

To be profitable/sound, commercial banks focus on: maximizing their returns & minimizing the risks they accept

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Commercial bank loan procedures

Commercial banks’ loan procedures

have 4 basic

stages

Application

Review

Award

Paying back, with

interest

failure

1

2

3

4We will examineat each stage in

more detail

applicant prepares proposal and submits to bank

Bank evaluates application and sets or negotiates conditions

Credit InvestigatorFinancial professional.Expertise in evaluating the

creditworthiness of individuals and businesses.

Determine the likelihood that a borrower will be able to meet financial obligations and pay back a loan,

By reviewing the borrower's financial history and determining whether market conditions will be conducive to repayment.

Process of Credit Investigation The credit investigation generally begins on receipt of memorandum

from the loan officer, which outlines pertinent information in connection with the proposed loan gathered during the visit to the applicant, and the scope of additional information required.

When the memorandum concerns a customer who is currently borrowing or who borrows occasionally it can be reasonably assumed that information in the credit file is current. Most progressive bank in order to maintain current information particularly in case of borrowing accounts follow the practice of maintaining a tickler or reminder file so that at least once a year at the close of the fiscal year the customer is asked to provide current figure so that the file can be revised and borrowed up-to-date.

Generally, after such revision the file is reviewed by the credit analyst. Should the new information indicate changes in the financial position or operation of the company which could possibly affect the relationship, such changes are discussed with the officer to whom the account is assigned.

Status of CreditIf Credit File,When the memorandum concerns a customer who is

currently borrowing then we can use a credit file. Credit file if properly prepared and kept current provide the loaning officer with the essential information outside perhaps of an interim statement which enable them to promptly reach a decision on loan applications received from frequent borrowers.

If Not Credit file If, however, there is no credit file, or if there is a file

and information is stale, the credit investigator undertake a new and complete investigation to which the credit investigator refers.

Functions of Credit Investigator Compare liquidity, profitability, and credit histories of individual or company

being evaluated with similar establishments to determine risk. Compile reports regarding finance and credit data. Analyze the financial records like earnings, savings, payments and purchase

of the company or individual and recommend other useful financial activity for further plans.

Manage files and records, stenography and transaction and other office procedure.

Complete loan applications, including credit analyses and summaries of loan requests, and submit to loan committees for approval.

Review individual or commercial customer files to identify and select delinquent accounts for collection.

Reconcile customer statements/billings. Minimize bad debt risk and maximize accounts receivable collections. Conduct collection calls and customer visits to collect Accounts Receivables. Market, train, counsel, advise, and communicate credit department policy

and procedures to company personnel. Generate financial ratios, using computer programs, to evaluate customers'

financial status.

Sources of credit investigation

The applicant interviewFinancial statementsThe bank own recordCredit agency reportsOther banks with whom the applicant

maintains account.Business concerns who sell the

applicantA visit to the plant or office of the

applicant

The Applicant InterviewHe also discuss the present operation of the

business and asked the pertinent questions regarding sales and management.

Determines what use is to be made of the funds

The method or schedule of repayment If collateral securities is to be required under

the circumstances how it is to be delivered. Following the initial interview the loaning

officer makes a notation in the file or prepares a memorandum covering the request for the loan.

Financial statementsThe statements, must be

complete, accurate, and sufficiently detailed. They should be supplemented and supported by such additional schedule and explanatory data

Balance Sheet Income StatementCash BudgetComparative analysis

Balance Sheet Assets should be neither understand or overstated. Fixed

asset in particularly should, by applying disclosed reserves, reasonably reflect current values.

Account receivable this may show amount and the age of receivables, Account Receivables must disclosed the accounts which are current, and those which are delinquent or should be charged off, according to the general understanding in the trade.

Inventories both raw materials and finished products, should reflect, under proper reserves have been setup, values at which respective inventory items could be currently and reasonably liquidated.

Liabilities should be fully disclosed, including actual figures together with an estimate of any liabilities which might be contingent upon future performance, pending law suits on tax liability.

Profit and Loss Account: The loan application should also be

accompanied by a profit and loss statement for the current period or the most recent period which is ended, showing the volume of business, the various profit percentage and reconciliation of surplus or net worth with the previous period.

Cash Budget forecast:Estimate of net sales, cost of sale other

disbursements and net receipts or to make or to make it simpler a statements of estimated income expense and profits

Questions Regarding Financial Statements Question Regarding account receivable Are bank accounts reconciled by someone other than the

person who authorized disbursement of funds? Are personnel who handle customer ledger and collection of

charge account separate from sales and shipping departments?

Are account receivable are periodically aged? Are the aging properly reflected in the balance sheet submitted to the bank?

Are the credit policy of the company adequate in connection with economic condition?

Is their effective cooperation between sales department and credit department

Is sufficient credit checking is undertaken in connection with the new customer in order to avoid bad and slow accounts.

Questions Regarding Financial Statements

Question regarding CashAre personnel of the subject firm who

handle or have access to money properly bonded?

Are controls set up over expense accounts to prevent cash from being extracted for unauthorized purposes?

Are proceeds from the sale of waste and by-products properly accounted for?

Are deductions from remittances of commissions properly verified?

The bank’s own records

It is a practice in some banks to maintain a file or record which they refer to as a certain file of information. Sometimes this consists of a form on which is noted the various relationship a person maintains with the bank.

An alert credit investigator, who is also astute, will, after making a check of the sources of information within the bank, summarize his findings and file it in the credit file for future use and reference.

Credit Agencies The principle services rendered by such agencies

are in connection with reporting on the: History of enterprise- date organized or founded. Corporate set-up- class of stoke- debt. Type of operation-manufacturing- wholesale-

retail. Management-title-ages-background-directors-

officers Financial position-balance sheet-profit & loss

figures. Real estate holdings. Liabilities-claims-or judgement. Purchasing terms Selling terms

5 C’s of Credit Analysis

Capacity  Is the ability to repay the loan Capital is the money you personally have

invested in the business and is an indication of how much you have at risk should the business fail.

Collateral, or guarantees, are additional forms of security you can provide the lender.

Conditions describe the intended purpose of the loan.

Character is the general impression you make on the prospective lender or investor.

Other banks with which the applicant maintains accounts:

Where a business firm or company maintains accounts with more than one bank

Where company or business firm changing banking relationships

Where an investigation of a company or business is being undertaken with a bank in connection with a credit inquiry received from the bank’s customer or another bank.

Other banks with which the applicant maintains accounts:

In case of company Is the management capable, conservative and morally responsible? Is borrowing continuous? What is the date of the last financial statement filed with the bank? What other banks have the accounts? Have accommodation ever been refused? Why? Have accommodations ever been unsecured? What class of assets were pledged as collateral security? Have borrowing been seasonal? What range of balances is maintained in the account? Are overdrafts permitted? Under what circumstances? Have cheques been returned for insufficient funds? When (date) was the company or business established? Are they connected with any other business? Is the company controlled by another? When did the bank last investigate the name?

Other banks with which the applicant maintains accounts:

In case of IndividualHow old is the individual?With what company or enterprise is he connected?What is his present position?What is his annual salary or income?Does he have any other source of information?Does he own his own house? Is he considered to be a solid citizen?Would you consider him responsible for the

amount of accommodation requested?What is the condition of his health? Is he prompt in meeting his obligation?

Business Concerns who sell the applicant:

How long have they been selling the subject?What amount of credit is extended?How are bills paid? If not paid according to the terms, what is

the reasons?What is the general condition in the trade?How do you regard the management? Is management conservative or

speculatively inclined?What other concerns are selling to subject?

A Visit to PlantHistory Method of operationsSubsidiary or affiliated businessesOther banks connectionsCredit extensions and borrowingsThe current balance sheetProfit and loss statementsManagement detailedCredit agency reports & trade commentsConcluding remarks

Case Study: Azam Ltd, an

Engineering company Azam Ltd. Company was incorporated in year 1950, three

years after the independence of Pakistan in 1947. Setup by an entrepreneur migrated from India and was the pioneer light engineering products company. Within a period of fifteen years it became leader in light engineering goods manufacturing with the help of European & American technology and their team of engineers to produce High Quality Air conditioning, Electrical goods and Building materials. The industry is set up at C-1, 352, Sector 16-B North Karachi Industrial Area. Company is currently doing business with Habib Bank and the UBL Bank. State Engineering Corporation (Pvt) Ltd is the associated company of Aam Engineering ltd.Mr. Mairaj Anees Ariff has been appointed as Managing Director/CEO, Azam Engineering Company Limitedin place of Mr. Azam. Following are the members of BOD.

Azam Ltd. Company Profit and Loss Account for the Year Ended 31 st Dec 1991

Description 1990

Rs. Amount

1990

Rs. Amount

1991

Rs. Amount

1991

Rs. Amount

Sales 1600,000 1400,000

Gain on sales of Investment

------------- 20,000

Gain arising from change of accounting basis for long term contracts

------------- 90,000

Total Revenue 1,600,000 1,510,000Less Expenses:

Wages 400,000 370,000

Material 900,000 880,000

General Expenses 260,000 (1,560,000) 250,000 1,500,000

Earnings before Taxes 40000 10000

Taxation (20000) ----------Net Profit 20,000 10,000

Azam Ltd. Company Balance Sheet As on 31st Dec 1991

Equity 1990

Rs.

1991

Rs.

Assets 1990

Rs.

1991

Rs.

Share Capital 300,000 300,000 Freehold Property 224,000 224,000

Capital Reserve

(Property Revaluation)

70,000 70,000 Equipment( at less depreciation)

200,000 160,000

Revenue Reserves 78,000 88,000 Unquoted Investment at cost

60,000 --------

11% Debentures 200,000 200,000

Current taxation 20,000 --------- Stock Material 108,000 40,000Finished goods and Work in Process

88,000 82,000

Sundry creditors 422,000 394,000 Uncompleted contracts

320,000 392,000

Bank overdraft 270,000 288,000 Sundry Debtor 360,000 442,000Total Equity 1,360,000 1,340,000 Total Assets 1,360,000 1,340,000

ContinueThe Company has currently has overdraft facilities of Rs.320,000 with the habib bank. The borrowings are secured by a floating charge over the company’s assets. On Sep, 25 1991 the borrowing facilities are fully utilized and the company request the renewal of facility for a further period of six monthsManaging director explain the requestWe had a bad year up to June 1991. We suffered from the power shortage and material shortage and we faced the general inflation which put up our cost. Consequently our total sales were down and these were inevitable consequences for our trading results.

Detailed Comments

SuggestionBank should take careful decision before the renewal of the facility for a further period of a six months. Bank should give the loan half of the requested amount by a company, and doubled the collateral, and say the company to improve your debt ratio to further extend the half amount of your sanction loan.

The End