Commercial Lending GA

8/6/2019 Commercial Lending GA

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Commercial LendingLending to businesses

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OVERVIEW OF COMMERCIAL LENDING STRUCTURE

Loan Approval Process Loan Monitoring Process Loan Termination Process

Loan Products

Solicitation of loan

Lending rationale

Credit EvaluationQualitative analysis

Quantitative analysis

Risks factors

Drawdown

Collection

Monitoring loans

Red flags

Reviews

Frauds

ContinueRelationshipafter repayment

Write off

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OVERVIEW OF COMMERCIAL LENDING STRUCTURE

Loan Approval Process Loan Monitoring Process Loan Termination Process

Value of clientrelationship

FinancialstatementBenchmarks

Strategic factors

Quality ofmanagement

Risk Exposure

Industry andeconomicOutlook

Other factors

Amountof loan

InterestRate

Security

LoanCovenants

Otherconditions

Timing ofRepayment

Value ofassets held

Compliancewithcovenants

Current

SpecialMention

Substandard

Doubtful

Loss

Complete repayment

Continue roll over

Discontinue

Or

Write Off

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CREDIT DECISIONS

If c red it standard is too tight

Few c ustomers Few bad deb ts Less rec overy Low profits

If c red it sta nd ard is lenient

Ma ny c ustomers Many ba d d ebts

More rec overy Low profits

There are two types of credit standards

There is no one best answer

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The amount of credit must be adequate

Duration of repayment must be reasonable

The financial position of the customer must justify the amount

The amount of credit must be monitored.

GENERAL PRINCIPLES


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Initialstage

Growthstage

Maturitystage

Decliningstage

Business Cycle

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LOAN APPROVAL PROCESS

Continue rollover

Discontinue.Loan Products

Solicitation of loan

Lending rationale

Credit EvaluationQualitative analysisQuantitative analysis

Risks factors

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INTRODUCTION TO COMMERCIAL LENDING PRODUCTS

a)Overdraft

b)Fixed Loans

c)Trade Lines

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Fixed LoanA facility with regular predetermined monthly installments. Installment is fixed forperiod of time, say 30 years Installment payment consists of the loan amountplus the interest

Overdraft facilityA facility with credit line granted based on a predetermined limitNo fixed monthly installments as the interest is calculated based on daily outstanding

balanceAllows flexibility to repay the loan anytime and freedom to re-use the moneyInterest charged is generally higher than the term loan

Term Loan and Overdraft combinedA facility that combines Term Loan and Overdraft. For example, 70% as term loanand 30% as OverdraftRegular loan installment on the term loan portion is requiredFlexibility on the repayment of overdraft portion


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Daily Rests VS Monthly Rests

Financial institutions may charge interest either on daily rests or monthly rests

depending upon the products offered. In the case of daily rests, the loan interest

is calculated on a daily basis, while in the case of monthly rests, interest is

calculated once a month based on the previous month's balance.

Under both types of loan, the principal sum immediately reduces every time a

loan installment is made during the initial years


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COST OF PROJECT AND SOURCE OF FINANCE

Cost of Project

Land and buildingPlant and machineryStocksDebtors

Source of Finance

Capital

Term loanOverdraft

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Letters of creditAn undertaking by the bank to pay against documents that are incompliance to the terms of the Letter of credit.This is financing for import and local purchase

Trust ReceiptShort term financing for import and local purchase

Shipping guaranteesUndertaking by a bank to the shipping company to release goods

In the absence of shipping documents.Bankers AcceptanceFinancing through bill of exchange to finance import, export, local sales andForeign sales

Bills purchaseFinancing through bill of exchange to finance export, local sales andForeign sales

Foreign Exchange LinesA service to hedge forward sales and purchases.

TRADE LINES

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ADVANCE PAYMENTADVANCE PAYMENT

MALAYSIAMALAYSIAMALAYSIA HONG KONGHONG KONGHONG KONG

IMPORTERIMPORTER EXPORTEREXPORTER

BANKBANK BANKBANK

PORTPORTPORTPORT

CLEARTHE GOODS

CONTRACT OF SALESUS$5,000/-

A/C

CREDITED

TT/DD

DD

TT

GOODS

GOODS

BL

1

3

34

2

8 5

6

7 DOCUMENTS

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RISKS TO IMPORTER

1. Seller risk (Non Supply of Goods).1. Seller risk (Non Supply of Goods).

2. Bank risk2. Bank risk

3. Country risk3. Country risk

4. Transit risk4. Transit risk

5. Exchange risk5. Exchange risk

Bank reportBank report

Rely on contract of saleRely on contract of sale

NANA

Economic reportEconomic report

Marine insuranceMarine insurance

Forward contract / optionForward contract / option

TO MITIGATE

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Buyer risk (Non payment for Goods).Buyer risk (Non payment for Goods).





NANA

NANA

NANA


Forward contractForward contract / option/ option

RISKS TO EXPORTER TO MITIGATE

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1. Current Account1. Current Account

2. Remittance2. Remittance

3. FX LINE3. FX LINE


2. FX LINE2. FX LINE

FACILITY/SERVICE FOR

IMPORTER


EXPORTER

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OPEN ACCOUNT TERMSOPEN ACCOUNT TERMS

MALAYSIAMALAYSIA HONG KONGHONG KONG

IMPORTERIMPORTEREXPORTEREXPORTER

BANKBANK BANKBANK

PORTPORT PORTPORT

CONTRACT OF SALES

US $5,000/-

A/C

CREDITEDTT/DD

TT

GOODS

CLEAR GOODS

AT PORTGOODS

BL

1

7 DD

7

86

2

3

5

DOCUMENTS4

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1. Seller risk (Non Supply of1. Seller risk (Non Supply of

Goods).Goods).





NANA

NANA



Forward contract /Forward contract /

optionoption

RISKS TO IMPORTER TO MITIGATE

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1. Buyer risk (Non1. Buyer risk (Non

payment for Goods).payment for Goods).






MECIBMECIBRely on contract of saleRely on contract of sale

NANA


MECIBMECIB


Forward contract /Forward contract /

optionoption


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FACILITY/SERVICE FOR FACILITY/SERVICE FOR


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3.FX LINE3.FX LINE


2.FX LINE2.FX LINE


IMPORTER


EXPORTER

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MALAYSIAMALAYSIA HONGHONG KONGKONG


BANKBANK BANKBANK

PORTPORT PORTPORT

COLLECTIONCOLLECTION--CLEANCLEAN

CONTRACT OF SALES

US$5,000/-

DOCUMENTS - COMMERCIAL

A/C CREDITED

ADVICE MATURITY DATEPAY/

ACCEPT

DOCUMENT-FINANCIAL

GOODS

CLEAR THEGOODS AT PORT

GOODS

B/L

PAY / ADVICE ACCEPTANCE

DOCUMENT -

FINANCIAL

4

1

104

2

6

9

3

5

8

7

PRESENT BILL

FOR PAYMENT/ACCEPTANCE

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NANA

NANA





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MECIBMECIB

Rely on contract of saleRely on contract of sale

NANA


MECIBMECIB



1.1. Buyer risk (Non payment ofBuyer risk (Non payment of

Goods).Goods).

2.2. Bank riskBank risk





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3. Inward clean collection3. Inward clean collection

4. Trust receipt4. Trust receipt -- collectioncollection

5. BA (purchase)5. BA (purchase)

6.FX LINE6.FX LINE


2. Outward clean collection2. Outward clean collection

3. Foreign Bills Purchased (DP)3. Foreign Bills Purchased (DP)

4. Foreign Bills Discounted (DA)4. Foreign Bills Discounted (DA)

5. BA (sales)5. BA (sales)

6.FX LINE6.FX LINE


IMPORTER


EXPORTER

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COLLECTIONCOLLECTION -- DOCUMENTARYDOCUMENTARY



BANKBANK BANKBANK

PORTPORT PORTPORT

CONTRACT OF SALES

US$50,000/-

A/C CREDITED

ADVICE MATURITY DATE

DOCUMENTS

GOODS

CLEAR GOODS

AT PORT

GOODS

BL

PAY/ADVICE ACCEPTANCE

1

4

29

5

3

6

7

8

PRESENT BILL FOR

PAYMENT/ACCEPTANCEPAY

/ACCEPT

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DOCUMENT

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RISKSTOIMPORTER TO MITIGATE


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NANA

NANA

NANA




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1. Buyer risk (Non payment of Goods).1. Buyer risk (Non payment of Goods).






MECIBMECIBRely on contract of saleRely on contract of sale

NANA


MECIBMECIBMarine insuranceMarine insurance



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1 Current Account1 Current Account


3. Inward Documentary collection4.3. Inward Documentary collection4.

Trust receiptTrust receipt -- collection5. BAcollection5. BA

(purchase)(purchase)

6.FX LINE6.FX LINE


2. Outward Documentary2. Outward Documentary

collectioncollection

3. Foreign Bills Purchased3. Foreign Bills Purchased

(DP)(DP)

4. Foreign Bills Discounted4. Foreign Bills Discounted

(DA)(DA)


6.FX LINE6.FX LINE


IMPORTER


EXPORTER

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DOCUMENTARY LETTER OF CREDITDOCUMENTARY LETTER OF CREDIT


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DOCUMENTARY LETTER OF CREDITDOCUMENTARY LETTER OF CREDIT



BANKBANK BANKBANK

PORTPORT PORTPORT

7

3

6

CONTRACT OF SALES

US$50,000/-

ADVICE L/C

APPLY

FOR FLC

ISSUE L/C

GOODS

PRESENT DOC.

FOR PAYMENT

OR GIVE TR / BA

FACILITY

GOODS

B/L

DOCUMENTS

DOCUMENTS

1

2

4 6

PAY / REIMBURSE

5

5

9

8

CLEAR

GOODS AT PORT

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11. Seller risk (Non Supply of Goods).. Seller risk (Non Supply of Goods).





NANA

NANA

NANA




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1.1. Buyer risk (Non payment of Goods).Buyer risk (Non payment of Goods).





Letter of creditLetter of credit

MECIBMECIB

MECIBMECIB

Confirmed LCConfirmed LC

MECIBMECIB

Confirmed LCConfirmed LC

Marine InsuranceMarine Insurance



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1.1. Current AccountCurrent Account


3. Import Letter of credit3. Import Letter of credit

4. Trust receipt/BA4. Trust receipt/BA

5. Shipping Guarantee5. Shipping Guarantee

6.FX LINE6.FX LINE


2. Foreign Bills Negotiation2. Foreign Bills Negotiation

3. Foreign Bills Purchased3. Foreign Bills Purchased


5.FX LINE5.FX LINE

SightSightUsanceUsance


IMPORTER


EXPORTER

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Soliciting credit

SOLICITATION OF CREDIT


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The objective of a commercial credit department is to generate good enoughapplications through aggressive marketing.

(This also puts financial Institutions in a dilemma not faced by other industries.Whilst they aggressively promote the product, they may also refuse to sell theproduct.This can upset many a client as a rejection would mean that the client is notcredit worthy ) A credit officer in his early years of marketing should beprepared to face and accept this situation as part and parcel of credit work.

Obtain enough information to make the best-balanced decision.

Ensure compliance to the banks policies and regulations in force.

Ensure that a good credit application is approved fast enough and thedecision delivered rapidly.

Build a relationship with the borrower


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Documentation

Documentation varies for the type of loans .The common securities takenin commercial credit are:DebenturesCharge on Land

Fixed depositsSharesUnit trustsIn addition a lender may also ask for supporting documents likeGuaranteesLife policies

The lender should have a good working knowledge of each of thesecurities and supporting documents namely:

Laws relating to the securitiesDocumentation procedures,Realising the security (How to sell the securities to offset the debt)


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Documentation



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Most FIs procedures explain the requirements for

Loan applications

Loan agreementsSecurity documentsSupport documentsInsurance cover

The lender has to make sure that the documents are completed and executedensuring

All appropriate sections are filled inAccurate numbers are entered and added correctlyCollateral description is correctAll necessary signatures are obtained where requiredSigners identities are verified

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UNDERSTANDING VARIOUS LENDING RATIONALE


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UNDERSTANDING VARIOUS LENDING RATIONALE

Asset Conversion

Asset Protection

Cash Flow lending

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Basic working capita l c yc leOr Asset Conversion c yc le


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Or Asset Conversion c yc le

Cash

Stocks

Debtors

Profit

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ELEMENTS OF ASSET CONVERSION CYCLE


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TERMS OF TRADE* Stockholding & Production Period

* Credit Given to Buyers* Credit Taken from Supplier

USE OF RATIOS* Stock Turnover Period

* Debtors Turnover Period* Creditors Turnover

LIMITATIONS* Static

* Historical

* Distorted for Seasonal Business.

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WORKING CAPITAL ASSESMENT


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NATURE OF BUSINESS-

TRADING/MANUFACTURING

PROJECTED MONTHLYSALES

DETERMINE THETERMS OF TRADE

DETERMINE FINANCINGREQUIREMENT

* Short Term Non Cash Facility* Short Term Cash Facilities

DETERMINE NETWORKING CAPITAL

STRUCTURE CREDIT,FACILITIES,

AMOUNT & PRICING

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WORKING CAPITAL ASSESSMENT


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TRADING CONCERN

NET WORKING CAPITALMONTH

ITEM

AMOUNT3

Stock (3x70% x100 000)

210 000

2

Debtor (2x95% x 100 000)

190 000

5

400 000

less

2

Creditors (2x70% x 100 000)

140 000

3

260 000

PROJECTED MONTHLY SALES - RM100,000COST OF SALES/SALES % -

70%

SGA EXPENSES/SALES % -

25%

NET PROFIT/SALES

% -

5%

TERMS OF TRADESTOCKS TURNOVER - 3 MONTHS

DEBTORS TURNOVER - 2 MONTHSCREDITORS TURNOVER - 2 MONTHS

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DETERMINING FINANCING REQUIREMENTS


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I) NON CASH FACILITY

AVERAGE LC PERIOD X AVERAGE MONTHLY LC PURCHASE

3 MONTHS X RM70,000 = RM210,000

II) SHORT TERM CASH FACILITIES

AFINANCINGALTERNATIVES

B

3 MONTHS PURCHASE FINANCING

2 MONTHS EXPENSES FINANCING

1 MONTH PURCHASE FINANCING

2 MONTHS SALES FINANCING

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DETERMINING FINANCING REQUIREMENTS


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PURCHASE FINANCING

(3 X 70% X RM100 000) RM210 000

EXPENSES FINANCING(2 X 25% X RM100 000) RM 50 000

RM260 000

PURCHASE FINANCING

(1 X 70% X RM100 000) RM 70 000

SALES FINANCING(2 X 95% X RM100 000)_ RM190 000

RM260 000

Alternative A

Alternative B

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FINANCING ALTERNATIVE A


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FACILITY AMOUNTPRICING

Foreign Documentary \ 210 000 0.1% commission per month

Letter of Credit

sight / usance Subject to minimum RM50/-

Sub limit

90 days TR / BA (Purchase) 210 000 TR - 2% +BLR

/ Shipping Guarantee BA - 1% Acceptance commission

+ Cost of funds

SG - 0.1% Commission flat min.

RM50/=

Overdraft 50 000 2 + BLR

FX Line (RM260 000) 26 000 FX 10%Rate Risk

286 000

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FINANCING ALTERNATIVE B


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FACILITY AMOUNT PRICING

Foreign Documentary Letter of Credit 210 000 0.1% commission per month

sight / usance Subject to minimum RM50/-

Sub limit30 days TR / BA (Purchase)/ 70 000 TR - 2% +BLR

Shipping Guarantee BA - 1% Acceptance commission

+ cost of funds

SG - 0.1% Commission flat min. RM50/

Foreign Bill Negotiation / 190 000 FBN - Foreign Bank Centre Rate

Foreign Bills Purchased / FBP - 0.1% commission flat max.

RM100/=

Foreign Bank Centre Rate

60 days bankers acceptance (sales) BA - 1% acceptance commission

+ Cost of funds

FX Line (RM260 000) 26 000 FX

10%Rate Risk286 000

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MANUFACTURING COMPANY EXAMPLE


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1.

2. PROJECTED SALES - RM500 000

RAW MATERIALS / SALES - 40%

W - I - P / SALES - 50%

FINISHED GOODS / SALES - 60%

EXPENSES / SALES - 25%

3. TERMS OF TRADE

STOCK TURNOVER

RAW MATERIALS - 3 MONTHS

W - I - P - 1/2 MONTH

FINISHED GOODS - 1 MONTH

DEBTORS TURNOVER - 2 MONTHS

CREDITORS TURNOVER - 1 MONTH

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Net Working Capital

Determine Financing Requirements


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MONTH ITEM AMOUNT

3 Raw Material (3x40%xRM500 000) 600 000

1/2 W - I - P (0.5x50%xRM500 000) 125 000

1 Finished Good (1x60%xRM500 000) 300 000

2 Debtors (2x85%xRM500 000) 850 000

6.5 1875 000

Less

1 Creditors (1x40%xRM500 000) 200 000

5.5 1675 00047

Determine Financing Requirements


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I) SHORT TERM CASH FACILITIES

PURCHASE FINANCING - RAW MATERIAL

(3+0.5+1-1x40%xRM500 000) = 700 000

EXPENSES FINANCING - PRODUCTION OVERHEADS & SGA

W - I - P VALUE ADDED (PRODUCTION OVERHEADS)

(1/2x10%RM500 000) = 25 000

FINISHED GOODS VALUE ADDED

(1x20%RM500 000) = 100 000

SALES FINANCING

(2x85%xRM500 000) = 850 000

1 675 000

II) SHORT TERM NON CASH FACILITIES

AVERAGE LC PERIOD X AVERAGE MONTHLY LC PURCHASES

3.5 MONTHS X RM200 000 = RM700 000 48

STRUCTURED CREDIT FACILITIES


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FACILITY AMOUNT PRICING

FOREIGN DOCUMENTARY 700 000 0.1%COMMISSION PER MONTH

LETTER OF CREDIT SIGHT/USANCE SUBJECT TO MINIMUM RM50/-

SUB LIMIT

105 DAYS TRUST RECEIPT/ 700 000 TR - 2% + BLRBANKERS ACCEPTANCE (PURCHASE)/ BA - 1% ACCEPTANCE COMMISSION

SHIPPING GUARANTEE + COST OF FUNDS

SG - 0.1% COMMISSION FLAT MIN. RM50/=

OVERDRAFT 125 000 2%+BLR

FOREIGN BILLS NEGOTIATION/ 850 000 FBN - FOREIGN BANK CENTRE RATE

FOREIGN BILLS PURCHASED/ FBP - 0.1% COMMISSION FLAT, MAX. RM100

+ FOREIGN BANK CENTRE RATE60 DAYS BANKERS ACCEPTANCE (SALES) BA - 1% ACCEPTANCE COMMISSION

+ COST OF FUNDS

FX LINE(RM1675 000) 167 500 FX

10% RATE RISK

1842 500

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ASSET PROTECTION LENDING


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This is security based lending- Overdraft against Fixed Deposit.Here the lender is not keen on how long the borrower need the funds but

how much and how liquid is the collateral.

Features

The ultimate justification is the value of collateral.

The borrower is of sufficient integrity and capability

Continuous roll over.

CASH FLOW LENDING


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Cash flow lending are loans longer than one year. All project financing isBased on cash flow lending.

Features:

Permanent needs

Streams of earnings is essential

Use for investment activities.(Corporate exercise)

CASH FLOW


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Cash Flow Statement

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Inflow

Sales 100 80 120 140 120 120 100 140 150 150

Rental 5 5 5 5 5 5 5 5 5 5 5 5

Total 5 5 105 85 125 145 125 125 105 145 155 155

Outflow

Office expenses 30 30 30 30 30 30 30 30 30 30 30 30

Salaries 30 30 30 30 30 30 30 30 30 30 30 30

Instalments 12 12 12 12 12 12 12 12 12 12 12 12

Purchases 30 30 30 30 30 30 30 30 30 30

Total 72 72 102 102 102 102 102 102 102 102 102 102

Total i/f 5 5 105 85 125 145 125 125 105 145 155 155

Total o/f 72 72 102 102 102 102 102 102 102 102 102 102

Surplus/Deficit -77 -77 3 -17 23 43 23 23 3 43 53 53

Opening Nil -77 -154 -151 -168 -145 -102 -79 -56 -53 -10 43

-77 -77 3 -17 23 43 23 23 3 43 53 53

Closing -77 -154 -151 -168 -145 -102 -79 -56 -53 -10 43 96

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Credit Evaluation

RISK MODEL


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Risk

Qualitative risk analysis

Management riskIndustry riskBusiness risk

Concentration riskEconomic conditionForeign exchange impactCompany condition

Technology

Quantitative risk

Financial analysisRatios

Fraud and Managing Fraud

5 Cs of Credit

THE 5 Cs


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Character The quality in a person /company to want to pay

This can be seen by past records

Capacity The ability of the person /company to pay

This can be known by income

Capital The persons /companys commitment-deposit

Condition Economic conditions affecting the person/company

Type of job

Collateral Assets as standby Eg. Own house/Company assets

Assessing basic credit worthiness of a customer

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The C.A.M.P.A.R.I . model


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Character- Willingness to pay versus ability to pay

Ability to repay-Adequacy of cash to meet repayment

Margin of finance-The client must contribute a certain margin ascommitment. The banker seldom grants 100% financing

Purpose-The purpose of the loan must be defined. Speculative purposes

are considered risky and will not be entertained

Amount-The amount the lender is willing to contribute to the client.This prompts a question. How much is too much for a client?Any amount beyond the repayment capacity of a client is too much

Repayment terms-This is the structure and terms of repayment

Insurance-In the event the borrower dies, the loan can be settled from

insurance proceeds55

MANAGEMENT RISK


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It has been found in studies that 65% of company failure is due to management

Therefore the skills and the ability of the management of the company mustthe examined.

The must be proactive and have a clear strategy.

Experience and past records are valuable guides.

One man management is considered as high risk

Success and skills of management are translated into financial performanceand bottom line.

MANAGEMENT RISK


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It has been found in studies that 65% of company failure is due to management

Therefore the skills and the ability of the management of the company mustthe examined.

The must be proactive and have a clear strategy.

Experience and past records are valuable guides.

One man management is considered as high risk

Success and skills of management are translated into financial performanceand bottom line.

SWOT ANALYSIS ON BUSINESS RISK


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STRENGTH

WEAKNESS

OPPORTUNITY

THREATS

LOAN MONITORING PROCESS


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Drawdown

Collection

Monitoring loans

Red flags

Reviews

Frauds

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CREDIT DISBURSEMENT


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1. Pre-Disbursement ( Before drawdown)2. Post-Disbursement ( After Drawdown)

IntroductionOnce documentation is completed either by the entrusted solicitor or the financialinstitution (FI)s staff, the credit administration officer or compliance officer has toensure that the documents are perfected before signing off for disbursement.

The officer

Checks to see that title, ownership and possession of the securities are in order.Ensures that both lender and borrower fully understand the terms of the agreement.(It is also the role of the solicitors preparing the documents)Stores the documents in safe custody.

At all times the officer processing the loan should not be the officer verifying thedocuments and disbursing the loan. This is to maintain impartiality and objectivity in

ensuring the FIs security and interest are protected.

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SOLICITORS ROLE


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At the time of taking legal action, third parties who offer security or guaranteessometimes file a defence stating that they had not been properly informed of thepurpose of the loan for which they had offered security or guarantee. Disputes alsoarise when thumb prints are not properly taken and guarantees are dated on the daythe guarantor was overseas although the guarantee had actually been signed onanother day.

These situations arise when the documents are signed in the presence of the creditadministration officer. If the documents are signed in the presence of the solicitors,

it is deemed that the solicitors had explained the contents of the documents to theborrower and such disputes will not arise later. Herein lies the justification of

entrusting the work to the solicitor. The solicitor will also act in the best interest of theFI in ensuring the documentation is perfected. As a general rule, the larger the loan,

the more the need to entrust documentation to solicitors.

If a FI does not perfect its security interest, it may find itself in an unsecured position,or its claim may be subsequent to an ensuing lien.

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PRE DISBURSEMENT


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Completion of documentationDocuments as contained in the letter of offer are to be executed by the borrower,the FIs power of attorney holders, guarantors and others, and stamped and

registered where applicable.

It is the lenders duty to prepare documentation. Generally, the lender relies onthe solicitor to design standardised documents which if properly completed

comply with all applicable regulations. The cost of preparing the documents

and all legal fees in relation to the preparation of the documents are to be borneby the borrower. A documentation checklist is often included in the banks policymanual as a reference source for lenders.

Possible documents required by financial institutions:

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PRE DISBURSEMENT


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Debenture

Charge (This document is taken when the property is issued with a title deed)

Transfer

Loan Agreement Cum Assignment (LACA).(This document is taken when the property has not been issued with a

title deed.)

Power of attorney

Lien holders caveat

Letters of Undertaking

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PRE DISBURSEMENT


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Support documents

Letter of Guarantee(ii)Life policies

General / fire insurance policies

Searches

Land search

Bankruptcy search

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POST DISBURSEMENT


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Types of covenantsMisuse of funds can lead to losses to the borrower and thereafternon-payment of the loan. Other factors can also lead to the eventualnon-payment of the loan. As such, to alert the FI, triggers are set in place.

These can be in the form of covenants. Violation or breach of the covenantscan result in the loan being recalled.

Events of defaultsFailure to notify the lender of bankruptcy.Breach of maintenance of margin (for shares and unit trusts).Ceased employment (if it is in the terms of the letter of offer).Breach of section 62 of BAFIA.Death or mental incapacity.

Positive covenants

The borrower to pay all quit rent and assessments on due dates.Renew insurance policies.

Negative covenantsLoan proceeds cannot be used for purposes other than that intended for in the

approval of the loan.65

POST DISBURSEMENT


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Loan administration (annual review and renewal)Except for term loans, most credit facilities are granted on a yearly basis andreviewed for renewal. This again provides an opportunity for the credit administrationofficer to review the documentation.

The loan review function for documentation includes:Ensuring that the loan is in compliance with all applicable regulations;Examining completed documents for accuracy, completeness and adherence tothe FIs lending policy;

Security coverage is adequate especially for shares;Utilisation of facility;Repayment track record;Following up to resolve documentation errors(Errors are sometimes detected after the loan is disbursed. This can happen whenfunds are disbursed against undertakings to deliver the documents);

Developing and maintaining management information about items such asdocumentation problems and the lenders performance; and

Maintaining follow-up for the necessary insurance documents.

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POST DISBURSEMENT


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SummaryLoan disbursement is an important element in developing a sound commercial portfolio.

It involves preparing and executing loan documents that comply with all applicableregulations and provides the FI with a firm basis for collecting and recalling its loans.

The documents must be accurate and complete in order to establish the FIs and theborrowers rights under the terms of the loan arrangement. When a loan is to be

secured by collateral, the FI must attach and perfect a security interest in the collateral.This requires a clear understanding of the regulations and state laws.

The loan review function helps ensure that the loan is in compliance with all applicable

regulations and that documentation is accurate and complete. Loan review is alsoresponsible for following up on documentation necessary to secure collateral andfor providing reports to management.

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LOAN CLASSIFICATION


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Current When payment is prompt and up to date

Special Mention Always delayed by one to two days

Substandard Loans that have been poorly designed

Doubtful Possibility of non recovery

Loss Loans that have been confirmed non-recoverable

Red Flags-Warning signsAccount operations


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Cheques issued in rounded figuresCustomer having d iffic ulty in payment

Customer may be a loan shark

Cheques banked in rounded figures

Deb tors having d iffic ulty payingPossib le Payment from loan sha rks

Heavy cash transac tion when business is done by c hequesEvidenc e of kiting

Red Flags-Warning signsAccount operations


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Persistent delay in interest servic ing

Cheques issued with insuffic ient funds(Hand to mouth living )

Deteriorating banker customer relationships

Transac tion taking plac e a t busy time.

Red Flags-Warning signsBusiness operations


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Frequent change of auditors

No management succession

No proper ac counting rec ords

Longer collec tion period

Reduced profit trend

Inc reasing gea ring

Increased bad debts

Red Flags-Warning signsUnusual transactions


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Banking in of cash at c lose of banking hours

Banking in cash amounts that do not justify business.

Crea ting b ills of exchange (Espec ially Banker Ac c ep tanc e ) for ra ising fundswithout genuine trade transac tions

Accommodation

CALCULATING COMMON FINANCIAL RATIOS


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Profitability

Profit after tax /capital

Profit after tax /sales

Gross Profit /sales

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Calculating common financial ratios


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Liquidity

Current assets /Current liabilities

Current Ratio

Acid Test Ratio

Current assets- Stock /Current liabilities

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Calculating common financial ratios


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Leverage

Gearing Ratio

Debt/Equity

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Activity ratios


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1 Total assets turnover

Sales/fixed assets =

2 Inventory turnover

Cost of good sold/Inventory

3 Average collection period

Accounts receivable x 365/Sales

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CAUSES OF FRAUD


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1. Poor supervision or control

2. Lack of understand ing of seriousness and consequenc e

3. Non complianc e to proc edure

4. Indifferent attitude of staff

5. Systemic weakness

6. Staff shortage

TYPES OF FRAUD


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Credit frauds

Fictitious borrowers

Manager opening fictitious account granted credit and withdrew thefunds

Conversion of Term Loan to over draft facility

Non existent company

Double financing the same asset

TYPES OF FRAUD


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Collateral

Over va luation

To ob ta in higher loan

Non existent propertyBank financed the b uild ing of a house on another land

Unauthorised releaseTitle released by mista kePart title released leaving the other title unrea lisab le

Forged documentsForged c urrent ac c ount sta tement

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TYPES OF FRAUD


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Disbursement

Wrong disbursement Wrong lot numbers

False c laims Arc hitec ts c ertific a te

WRITING A CREDIT MEMO


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Executive summaryWhy should you lend

Main MemoPurposeFacility RationaleBackground and operations

Financial analysisRisk AnalysisSecurityConclusions and recommendationsAppendix

Terms and conditionsDirectors profilesFinancial spread sheetsOthers

Commercial Lending GA

Documents

Transcript of Commercial Lending GA