Post on 06-Apr-2018
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Principles of Lending
Presented by
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General Lending principlesGeneral Lending principles
A lender does lend money and does notA lender does lend money and does not
give it away.give it away.
Lenders must seek to arrive at anLenders must seek to arrive at anobjective decision.objective decision.
The approach of the true professional isThe approach of the true professional is
to resist outside pressures and to insistto resist outside pressures and to insiston sufficient time and information toon sufficient time and information to
understand and evaluate the proposition.understand and evaluate the proposition.
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Professional lending principlesProfessional lending principles
Get full information from the customer and notGet full information from the customer and notmake unnecessary assumptions or fill inmake unnecessary assumptions or fill inmissing details.missing details.
Do not take a customers statements at faceDo not take a customers statements at facevalue and ask for evidence that will providevalue and ask for evidence that will provideindependent corroboration.independent corroboration.
Distinguish between facts, estimates andDistinguish between facts, estimates and
opinions when forming aopinions when forming a judgementjudgement.. Think again when the gut reaction suggestsThink again when the gut reaction suggests
caution,evencaution,even though the factual assessmentthough the factual assessmentlooks satisfactory.looks satisfactory.
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TRADITIONAL METHODSOFTRADITIONAL METHODSOF
CREDITANALYSISCREDITANALYSIS Anyone can lend, but lending money andAnyone can lend, but lending money and
ensuring it repayment distinguishesensuring it repayment distinguishesbetween a good banker and a bad banker.between a good banker and a bad banker.
When you are dealing with people, it isWhen you are dealing with people, it isalmost impossible to predict howalmost impossible to predict howsomeone will behave in the future.someone will behave in the future.
It is important therefore that lendersIt is important therefore that lendersexercise sound judgment while grantingexercise sound judgment while grantingloan.loan.
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Means of gathering informationMeans of gathering information
Credit check of internal bank records or otherCredit check of internal bank records or otherfinancial institution.financial institution.
Documentary evidence such as salary/incomeDocumentary evidence such as salary/income
statements, drivers license, utility billstatements, drivers license, utility bill For business borrowers, character assessmentFor business borrowers, character assessment
involves assessing the character of the businessinvolves assessing the character of the businessowners or, in the case of companies, theowners or, in the case of companies, themembers of the board.members of the board.
Confidential reports from credit rating agenciesConfidential reports from credit rating agenciesare another source.are another source.
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ProfessionalProfessional
lending principleslending principles
The purpose of any creditThe purpose of any credit
assessment or analysis is theassessment or analysis is the
measurement of credit risk.measurement of credit risk.
Borrowers credit assessment isBorrowers credit assessment is
done using the following criteria,done using the following criteria,popularly known as the six Cs ofpopularly known as the six Cs of
lending.lending.
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Evaluation of
Borrowers
CharacterCharacter
CapacityC
apacity CapitalCapital
ConditionsConditions
CollateralCollateral
ComplianceCompliance
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CHARACTERCHARACTER
Character is the sum total of humanCharacter is the sum total of humanqualities of honesty , integrity, moralityqualities of honesty , integrity, moralityand so on.and so on.
Character is perhaps the most importantCharacter is perhaps the most importantand at times the most difficult criterion toand at times the most difficult criterion toassess.assess.
Character assessment involves collectingCharacter assessment involves collectinginformation about the borrowers trackinformation about the borrowers trackrecord of integrity, repayment ability andrecord of integrity, repayment ability andspending habits.spending habits.
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CAPACITYCAPACITY
Capacity is the ability to repay the loan togetherCapacity is the ability to repay the loan togetherwith interest as per the prewith interest as per the pre--determined schedule.determined schedule.
A borrowers capacity depends on two factors:A borrowers capacity depends on two factors:
first, the borrowers financial position should befirst, the borrowers financial position should besound; and second, the borrower must be able tosound; and second, the borrower must be able togenerate sufficient net income to service the loangenerate sufficient net income to service the loanrepayment, after meeting the sustenance.repayment, after meeting the sustenance.
In the case of businesses, lenders usually askIn the case of businesses, lenders usually askfor audited financial statements and projectedfor audited financial statements and projectedcash flow to determine the financial soundnesscash flow to determine the financial soundnessor creditworthiness of the business borrower.or creditworthiness of the business borrower.
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AbilityAbility
This aspect relates to the borrowers ability inThis aspect relates to the borrowers ability inmanaging financial affairs and is similar tomanaging financial affairs and is similar tocharacter as far as personal customers arecharacter as far as personal customers are
concerned.concerned. Is there a good spread of skill and experienceIs there a good spread of skill and experience
among the management team in, foramong the management team in, forexample,production,marketing and finance.example,production,marketing and finance.
Are they committed to making the companyAre they committed to making the company
successful?successful? Where the finance is earmarked for a specific areaWhere the finance is earmarked for a specific area
of activity, do they have the necessaryof activity, do they have the necessaryexperience/expertise in that area.experience/expertise in that area.
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CAPITALCAPITAL
Capital refers to the capital contribution that theCapital refers to the capital contribution that theborrower proposes to make in the totalborrower proposes to make in the totalinvestment.investment.
An investment is usually financed partly byAn investment is usually financed partly bybank loan and partly by the capital contributionbank loan and partly by the capital contributionof the owner.of the owner.
The owners contribution is called the ownersThe owners contribution is called the ownersmargin.margin.
The greater the owners contribution to a projectThe greater the owners contribution to a projectthe greater is the lenders confidence in thethe greater is the lenders confidence in theventure. Banks usually expect usually a 25venture. Banks usually expect usually a 25percent input from the borrower.percent input from the borrower.
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CONDITIONCONDITION
An analysis of conditions coversAn analysis of conditions covers
external and internal factors.external and internal factors.
It also covers the conditions andIt also covers the conditions and
terms of the loan.terms of the loan.
The riskier the advance theThe riskier the advance thestricter are the terms andstricter are the terms and
conditions.conditions.
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EXTERNAL CONDITIONSEXTERNAL CONDITIONS
Recession, SlowdownRecession, Slowdown
Interest rate shockInterest rate shock
High InflationHigh Inflation Threat of warThreat of war
CrimeCrime
Internal DisturbancesInternal Disturbances
EmergencyEmergency
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Other Conditions
PoliticalPolitical
EconomicEconomic
SocialSocial
TechnologicalTechnological
EcologicalEcological
LegalLegal
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INTERNAL CONDITIONSINTERNAL CONDITIONS
Lending policiesLending policies
Lending budgetLending budget
Availability of expert staff to monitor loan.Availability of expert staff to monitor loan.
A financial institution may decide to followA financial institution may decide to followrestrictive lending policies, the lending budgetrestrictive lending policies, the lending budgetand the availability of a funds constraint, or toand the availability of a funds constraint, or toexpand lending business in particularexpand lending business in particularsegments of the market.segments of the market.
Credit analysis should take such aspects intoCredit analysis should take such aspects intoaccount.account.
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COLLATERALCOLLATERAL
Collateral is also known asCollateral is also known as
secondary source of repayment.secondary source of repayment.
When a loan cannot be paid out ofWhen a loan cannot be paid out ofprimary source, lenders usually takeprimary source, lenders usually take
possession of collateral and disposepossession of collateral and dispose
of it and use the proceeds to set offof it and use the proceeds to set offthe outstanding loan amount.the outstanding loan amount.
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QUALITIESOFGOODQUALITIESOFGOOD
COLLATERALCOLLATERAL The price of the security should be stable, orThe price of the security should be stable, or
not subject to wide fluctuations.not subject to wide fluctuations.
The marketability of the security should beThe marketability of the security should be
rated good.rated good. The security should be easily valued.The security should be easily valued.
The security should not deteriorate rapidly overThe security should not deteriorate rapidly overtime.time.
If security is quickly transportable or portable,If security is quickly transportable or portable,then the lender can sell it in another market. Ifthen the lender can sell it in another market. Ifthe security is not portable then, the lender maythe security is not portable then, the lender mayfind it hard to sell that security in the localfind it hard to sell that security in the local
market.market.
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Compliance
According to rules and regulationsAccording to rules and regulations
Meeting all the formalitiesMeeting all the formalities
Guidelines from GovernmentGuidelines from Government
Regulatory agency instructionsRegulatory agency instructions
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AmountAmount
Is the customer asking for either tooIs the customer asking for either too
much or too little?.much or too little?.
There are dangers in both and it isThere are dangers in both and it isimportant therefore to establish that theimportant therefore to establish that the
amount requested is correct and that allamount requested is correct and that all
incidental expenses have beenincidental expenses have been
considered.considered.
The good borrower will have allowed forThe good borrower will have allowed for
contingencies.contingencies.
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RepaymentRepayment
The real risk in lending is to be found in theThe real risk in lending is to be found in theassessment of the repayment proposals.assessment of the repayment proposals.
It is important that the source of repaymentIt is important that the source of repayment
is made quite clear at the outset and theis made quite clear at the outset and thelender must establish the degree of certaintylender must establish the degree of certaintythat the promised funds will be received.that the promised funds will be received.
Where the source of repayment is income/Where the source of repayment is income/
cash flow , the lender will need projections tocash flow , the lender will need projections toensure that there are surplus funds to coverensure that there are surplus funds to coverrepayment after meeting other commitments.repayment after meeting other commitments.
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Fair Practices Code Loan application forms in case ofPSLoan application forms in case ofPS
advances up to Rs.2 lakhs, shouldadvances up to Rs.2 lakhs, shouldinclude information such as fee/ chargesinclude information such as fee/ charges
payablepayable
Acknowledge receipt of all loanAcknowledge receipt of all loanapplicationsapplications
Main reason for rejection to be conveyedMain reason for rejection to be conveyedto small borrowers/applicants up toto small borrowers/applicants up toRs.2lakhs, in writing within the stipulatedRs.2lakhs, in writing within the stipulatedtimetime
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Fair Practices Code
No interference by the lender inNo interference by the lender in
the affairs of the borrower,the affairs of the borrower,
except in case of Terms andexcept in case of Terms and
conditions complianceconditions compliance
Consent/ objection on requestConsent/ objection on request
for transfer of loan to befor transfer of loan to be
conveyed within 21 daysconveyed within 21 days
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Fair Practices Code -US Equal Credit Opportunity ActEqual Credit Opportunity Act
No discrimination on the basis ofNo discrimination on the basis of
AgeAge
SexSex
Marital statusMarital status
Dependence on income fromDependence on income from
public assistance programmepublic assistance programme
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Fair Practices Code -US In case of denial the applicant must be notifiedIn case of denial the applicant must be notified
within 30 days with statement of reasonwithin 30 days with statement of reason
If discriminated on any of the stated groundsIf discriminated on any of the stated groundsCheck with state attorney generalCheck with state attorney general
State may prosecute the bankerState may prosecute the banker
Applicant can claim damages /compensationApplicant can claim damages /compensation
for attorneys fees, Court costsfor attorneys fees, Court costs
File a class action suit along with other suchFile a class action suit along with other such
personspersons
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Thanks for your attentionThanks for your attention
Dr. S. C. BihariDr. S. C. Bihari
Tell:Tell:0841708417--236660 to 65(Extn: 6214)236660 to 65(Extn: 6214) Mail:scbihari@gmail.comMail:scbihari@gmail.com