Commercial Lending

Lending to businesses

OVERVIEW OF COMMERCIAL LENDING STRUCTURE

Loan Approval Process

Loan Monitoring Process

Loan Termination Process

Loan Products Solicitation of loan Lending rationale Credit Evaluation Qualitative analysis Quantitative analysis Risks factors

Drawdown Collection Monitoring loans Red flags Reviews Frauds

Continue Relationship after repayment Write off

OVERVIEW OF COMMERCIAL LENDING STRUCTURE

Loan Approval Process

Value of client relationship Financial statement Benchmarks Strategic factors Quality of management Risk Exposure Industry and economic Outlook Other factors Timing of Repayment

Loan Monitoring Process

Amount of loan Current Special Mention Interest Rate Substandard

Loan Termination Process

Complete repayment Continue roll over Discontinue Or

Value of assets held

Security Compliance with covenants

Doubtful Loss

Write Off

Loan Covenants

Other conditions

CREDIT DECISIONS

There are two types of credit standards If credit standard is too tight Few customers Few bad debts Less recovery Low profits If credit standard is lenient Many customers Many bad debts More recovery Low profits

There is no one best answer

4

GENERAL PRINCIPLES

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.

Business Cycle Initial stage Growth stage Maturity stage Declining stage

LOAN APPROVAL PROCESS

Continue roll over

Loan Products
Discontinue.

Solicitation of loan Lending rationale Credit Evaluation Qualitative analysis Quantitative analysis Risks factors

INTRODUCTION TO COMMERCIAL LENDING PRODUCTS

a)Overdraft b)Fixed Loans c)Trade Lines

8

INTRODUCTION TO COMMERCIAL LENDING PRODUCTS

Fixed Loan A facility with regular predetermined monthly installments. Installment is fixed for period of time, say 30 years Installment payment consists of the loan amount plus the interest Overdraft facility A facility with credit line granted based on a predetermined limit No fixed monthly installments as the interest is calculated based on daily outstanding balance Allows flexibility to repay the loan anytime and freedom to re-use the money Interest charged is generally higher than the term loan Term Loan and Overdraft combined A facility that combines Term Loan and Overdraft. For example, 70% as term loan and 30% as Overdraft Regular loan installment on the term loan portion is required Flexibility on the repayment of overdraft portion
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INTRODUCTION TO COMMERCIAL LENDING PRODUCTS

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

10

COST OF PROJECT AND SOURCE OF FINANCE

Cost of Project Land and building Plant and machinery Stocks Debtors Source of Finance Capital Term loan Overdraft

11

TRADE LINES

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

Trust Receipt
Short term financing for import and local purchase

Shipping guarantees
Undertaking by a bank to the shipping company to release goods In the absence of shipping documents.

Bankers Acceptance
Financing through bill of exchange to finance import, export, local sales and Foreign sales

Bills purchase
Financing through bill of exchange to finance export, local sales and Foreign sales

Foreign Exchange Lines

A service to hedge forward sales and purchases.

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ADVANCE PAYMENT

DOCUMENTS

MALAYSIA
1

HONG KONG
CONTRACT OF SALES US$5,000/DD

IMPORTER

EXPORTER
4

3 2

TT/DD
3

A/C CREDITED TT

BANK
CLEAR 8 THE GOODS

BANK
5

GOODS BL
6

PORT

GOODS

PORT
13

RISKS TO IMPORTER

TO MITIGATE

1. Seller risk (Non Supply of Goods).

Bank report Rely on contract of sale

2. Bank risk

NA Economic report

3. Country risk

4. Transit risk

Marine insurance Forward contract / option

5. Exchange risk

14

RISKS TO EXPORTER

TO MITIGATE

Buyer risk (Non payment for Goods). 2. Bank risk

NA

NA 3. Country risk NA 4. Transit risk Marine insurance 5. Exchange risk Forward contract / option
15

FACILITY/SERVICE FOR IMPORTER

FACILITY/SERVICE FOR EXPORTER

1. Current Account 2. Remittance 3. FX LINE

1. Current Account 2. FX LINE

16

OPEN ACCOUNT TERMS

MALAYSIA
4 DOCUMENTS

HONG KONG

IMPORTER

CONTRACT OF SALES US $5,000/7

EXPORTER

DD

TT/DD
7

A/C CREDITED TT

BANK
5

BANK
2

CLEAR GOODS AT PORT

3

GOODS BL GOODS

PORT

PORT
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RISKS TO IMPORTER

TO MITIGATE

1. Seller risk (Non Supply of Goods). 2. Bank risk 3. Country risk 4. Transit risk 5. Exchange risk

NA

NA Economic report Marine insurance Forward contract / option

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RISKS TO EXPORTER

TO MITIGATE

1. Buyer risk (Non payment for Goods). 2. Bank risk 3. Country risk 4. Transit risk 5. Exchange risk

Bank report MECIB Rely on contract of sale NA Economic report MECIB Marine insurance Forward contract / option

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FACILITY/SERVICE FOR IMPORTER

FACILITY/SERVICE FOR EXPORTER

1. Current Account 2. Remittance 3.FX LINE

1. Current Account 2.FX LINE

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COLLECTION-CLEAN HONG KONG

EXPORTER

MALAYSIA
IMPORTER

4 DOCUMENTS - COMMERCIAL

CONTRACT OF SALES US$5,000/-

6 PRESENT BILL FOR PAYMENT/ACCEPTANCE 5 DOCUMENT-FINANCIAL

10 A/C CREDITED ADVICE MATURITY DATE

4 DOCUMENT FINANCIAL

PAY/ ACCEPT

BANK
9 PAY / ADVICE ACCEPTANCE

BANK

CLEAR THE GOODS AT PORT

GOODS B/L

PORT

GOODS

PORT
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RISKS TO IMPORTER

TO MITIGATE

1. Seller risk (Non Supply of Goods). 2. Bank risk 3. Country risk 4. Transit risk 5. Exchange risk

NA NA Marine insurance Marine insurance Forward contract / option

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RISKS TO EXPORTER

TO MITIGATE

1. Buyer risk (Non payment of Goods). 2. Bank risk 3. Country risk

Bank report MECIB Rely on contract of sale NA Economic report MECIB

4. Transit risk

5. Exchange risk

Marine insurance

Forward contract / option

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FACILITY/SERVICE FOR IMPORTER

FACILITY/SERVICE FOR EXPORTER

1. Current Account 2. Remittance 3. Inward clean collection 4. Trust receipt - collection 5. BA (purchase) 6.FX LINE

1. Current Account 2. Outward clean collection 3. Foreign Bills Purchased (DP) 4. Foreign Bills Discounted (DA) 5. BA (sales) 6.FX LINE
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COLLECTION - DOCUMENTARY

MALAYSIA
1

HONG KONG
CONTRACT OF SALES US$50,000/10

IMPORTER

EXPORTER
4 DOCUMENT

7 PAY /ACCEPT 6

PRESENT BILL FOR PAYMENT/ACCEPTANCE

A/C CREDITED ADVICE MATURITY DATE

5 DOCUMENTS

BANK
8 9 PAY/ADVICE ACCEPTANCE

BANK

CLEAR GOODS AT PORT

3

GOODS BL

GOODS

PORT

PORT
25

RISKS TO IMPORTER

TO MITIGATE

1. Seller risk (Non Supply of Goods). 2. Bank risk 3. Country risk 4. Transit risk 5. Exchange risk

NA NA NA Marine insurance Forward contract / option

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RISKS TO EXPORTER

TO MITIGATE

1. Buyer risk (Non payment of Goods). 2. Bank risk 3. Country risk

Bank report MECIB Rely on contract of sale NA Economic report

4. Transit risk

MECIB Marine insurance

5. Exchange risk Forward contract / option

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FACILITY/SERVICE FOR IMPORTER 1 Current Account 2. Remittance

FACILITY/SERVICE FOR EXPORTER 1. Current Account 2. Outward Documentary collection

3. Inward Documentary collection4.

3. Foreign Bills Purchased (DP)

Trust receipt - collection5. BA

4. Foreign Bills Discounted (DA)

(purchase) 6.FX LINE

5. BA (sales) 6.FX LINE

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DOCUMENTARY LETTER OF CREDIT

MALAYSIA
1

HONG KONG
CONTRACT OF SALES US$50,000/-

IMPORTER
2 8 PRESENT DOC. FOR PAYMENT OR GIVE TR / BA FACILITY APPLY FOR FLC 7

EXPORTER

4 PAY / REIMBURSE ADVICE L/C

6 DOCUMENTS

ISSUE L/C

BANK
6 9 CLEAR GOODS AT PORT DOCUMENTS

BANK
5 GOODS B/L

GOODS

PORT

PORT
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RISKS TO IMPORTER

TO MITIGATE

1. Seller risk (Non Supply of Goods). 2. Bank risk 3. Country risk 4. Transit risk 5. Exchange risk

NA NA NA Marine insurance Forward contract / option

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RISKS TO EXPORTER

TO MITIGATE

1. Buyer risk (Non payment of Goods).

Letter of credit MECIB MECIB Confirmed LC MECIB Confirmed LC Marine Insurance Forward contract / option

2. Bank risk 3. Country risk 4. Transit risk 5. Exchange risk

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FACILITY/SERVICE FOR IMPORTER

FACILITY/SERVICE FOR EXPORTER

1. Current Account 2. Remittance 3. Import Letter of credit 4. Trust receipt/BA 5. Shipping Guarantee 6.FX LINE Sight Usance

1. Current Account 2. Foreign Bills Negotiation 3. Foreign Bills Purchased 4. BA (sales) 5.FX LINE

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Soliciting credit SOLICITATION OF CREDIT

The objective of a commercial credit department is to generate good enough applications 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 the product. This can upset many a client as a rejection would mean that the client is not credit worthy ) A credit officer in his early years of marketing should be prepared 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 the decision delivered rapidly. Build a relationship with the borrower
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SOLICITATION OF CREDIT Documentation Documentation varies for the type of loans .The common securities taken in commercial credit are: Debentures Charge on Land Fixed deposits Shares Unit trusts In addition a lender may also ask for supporting documents like Guarantees Life policies The lender should have a good working knowledge of each of the securities and supporting documents namely: Laws relating to the securities Documentation procedures, Realising the security (How to sell the securities to offset the debt)

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Documentation SOLICITATION OF CREDIT

Most FIs procedures explain the requirements for Loan applications Loan agreements Security documents Support documents Insurance cover The lender has to make sure that the documents are completed and executed ensuring All appropriate sections are filled in Accurate numbers are entered and added correctly Collateral description is correct All necessary signatures are obtained where required Signers identities are verified
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UNDERSTANDING VARIOUS LENDING RATIONALE

Asset Conversion Asset Protection Cash Flow lending

36

ASSET CONVERSION

Asset Conversion = Financing stocks to sales using the measurement of time Features: Short term financing Self liquidating Payback on the ability to complete the cycle. Generally unsecured. Primary protect is based on the borrowers ability to complete cycle.

37

Basic working capital cycle Or Asset Conversion cycle

Cash

Stocks Profit

Debtors
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ELEMENTS OF ASSET CONVERSION CYCLE

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

NATURE OF BUSINESS - TRADING/MANUFACTURING

PROJECTED MONTHLY SALES

DETERMINE THE TERMS OF TRADE

DETERMINE NET WORKING CAPITAL

STRUCTURE CREDIT, FACILITIES, AMOUNT & PRICING

DETERMINE FINANCING REQUIREMENT * Short Term Non Cash Facility * Short Term Cash Facilities

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WORKING CAPITAL ASSESSMENT

TRADING CONCERN PROJECTED MONTHLY SALES - RM100,000 COST OF SALES/SALES % - 70% SGA EXPENSES/SALES % - 25% NET PROFIT/SALES % - 5%

TERMS OF TRADE
STOCKS TURNOVER - 3 MONTHS DEBTORS TURNOVER - 2 MONTHS CREDITORS TURNOVER - 2 MONTHS

NET WORKING CAPITAL MONTH 3 2 5 less 2 3 ITEM Stock (3x70% x100 000) Debtor (2x95% x 100 000) AMOUNT 210 000 190 000 400 000

Creditors (2x70% x 100 000) 140 000 260 000

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DETERMINING FINANCING REQUIREMENTS

I) NON CASH FACILITY AVERAGE LC PERIOD X AVERAGE MONTHLY LC PURCHASE 3 MONTHS X RM70,000 = RM210,000

II) SHORT TERM CASH FACILITIES 3 MONTHS PURCHASE FINANCING A FINANCING ALTERNATIVES B 2 MONTHS EXPENSES FINANCING 1 MONTH PURCHASE FINANCING 2 MONTHS SALES FINANCING
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DETERMINING FINANCING REQUIREMENTS

Alternative A
PURCHASE FINANCING (3 X 70% X RM100 000) EXPENSES FINANCING (2 X 25% X RM100 000) RM210 000

RM 50 000 RM260 000

Alternative B
PURCHASE FINANCING (1 X 70% X RM100 000) SALES FINANCING (2 X 95% X RM100 000)_ RM 70 000

RM190 000 RM260 000

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FINANCING ALTERNATIVE A
FACILITY Foreign Documentary \ Letter of Credit sight / usance Sub limit 90 days TR / BA (Purchase) / Shipping Guarantee 210 000 TR - 2% +BLR BA - 1% Acceptance commission + Cost of funds SG - 0.1% Commission flat min. RM50/= Overdraft FX Line (RM260 000) 50 000 26 000 286 000
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AMOUNT PRICING 210 000 0.1% commission per month Subject to minimum RM50/-

2 + BLR FX 10%Rate Risk

FINANCING ALTERNATIVE B

FACILITY
Foreign Documentary Letter of Credit sight / usance Sub limit 30 days TR / BA (Purchase)/ Shipping Guarantee

AMOUNT
210 000

PRICING
0.1% commission per month Subject to minimum RM50/-

70 000

TR - 2% +BLR BA - 1% Acceptance commission + cost of funds SG - 0.1% Commission flat min. RM50/= FBN - Foreign Bank Centre Rate FBP - 0.1% commission flat max. RM100/= Foreign Bank Centre Rate BA - 1% acceptance commission + Cost of funds FX

Foreign Bill Negotiation / Foreign Bills Purchased /

190 000

60 days bankers acceptance (sales) FX Line (RM260 000) 10%Rate Risk 26 000 286 000

45

MANUFACTURING COMPANY EXAMPLE

1. 2. PROJECTED SALES RAW MATERIALS / SALES W - I - P / SALES FINISHED GOODS / SALES EXPENSES / SALES 3. TERMS OF TRADE STOCK TURNOVER RAW MATERIALS W-I-P FINISHED GOODS DEBTORS TURNOVER CREDITORS TURNOVER - 3 MONTHS - 1/2 MONTH - 1 MONTH - 2 MONTHS - 1 MONTH - RM500 000 - 40% - 50% - 60% - 25%

46

Determine Financing Requirements Net Working Capital

MONTH

ITEM

AMOUNT

Raw Material (3x40%xRM500 000)

600 000

1/2

W-I-P

(0.5x50%xRM500 000) 125 000

Finished Good (1x60%xRM500 000)

300 000

2 6.5 Less 1 5.5

Debtors

(2x85%xRM500 000)

850 000 1875 000

Creditors

(1x40%xRM500 000)

200 000 1675 000

47

Determine Financing Requirements

I) SHORT TERM CASH FACILITIES PURCHASE FINANCING - RAW MATERIAL (3+0.5+1-1x40%xRM500 000) EXPENSES FINANCING - PRODUCTION OVERHEADS & SGA W - I - P VALUE ADDED (PRODUCTION OVERHEADS) (1/2x10%RM500 000) FINISHED GOODS VALUE ADDED (1x20%RM500 000) SALES FINANCING (2x85%xRM500 000)

= 700 000

25 000

= 100 000

= 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

FACILITY FOREIGN DOCUMENTARY LETTER OF CREDIT SIGHT/USANCE SUB LIMIT 105 DAYS TRUST RECEIPT/ BANKERS ACCEPTANCE (PURCHASE)/ SHIPPING GUARANTEE

AMOUNT 700 000

PRICING 0.1%COMMISSION PER MONTH SUBJECT TO MINIMUM RM50/-

700 000

TR - 2% + BLR BA - 1% ACCEPTANCE COMMISSION + COST OF FUNDS SG - 0.1% COMMISSION FLAT MIN. RM50/=

OVERDRAFT FOREIGN BILLS NEGOTIATION/ FOREIGN BILLS PURCHASED/ 60 DAYS BANKERS ACCEPTANCE (SALES) FX LINE(RM1675 000) 10% RATE RISK

125 000 850 000

2%+BLR FBN - FOREIGN BANK CENTRE RATE + FOREIGN BANK CENTRE RATE BA - 1% ACCEPTANCE COMMISSION + COST OF FUNDS

FBP - 0.1% COMMISSION FLAT, MAX. RM100/

167 500 1842 500

FX

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ASSET PROTECTION LENDING

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.

50

CASH FLOW LENDING

Cash flow lending are loans longer than one year. All project financing is Based on cash flow lending. Features: Permanent needs Streams of earnings is essential Use for investment activities.(Corporate exercise)

51

CASH FLOW
Cash Flow Statement Jan Inflow Sales Rental Total 5 5 5 5 100 5 105 80 5 85 120 5 125 140 5 145 120 5 125 120 5 125 100 5 105 140 5 145 150 5 155 150 5 155 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Outflow Office expenses Salaries Instalments Purchases Total 72 72 30 30 12 30 30 12 30 30 12 30 102 30 30 12 30 102 30 30 12 30 102 30 30 12 30 102 30 30 12 30 102 30 30 12 30 102 30 30 12 30 102 30 30 12 30 102 30 30 12 30 102 30 30 12 30 102

Total i/f Total o/f Surplus/Deficit Opening Nil

5 72 -77

5 72 -77 -77

105 102 3 -154 3 -151

85 102 -17 -151 -17 -168

125 102 23 -168 23 -145

145 102 43 -145 43 -102

125 102 23 -102 23 -79

125 102 23 -79 23 -56

105 102 3 -56 3 -53

145 102 43 -53 43 -10

155 102 53 -10 53 43

155 102 53 43 53 96

-77 Closing -77

-77 -154

52

Credit Evaluation RISK MODEL

Risk

Quantitative risk Financial analysis Ratios Fraud and Managing Fraud

Qualitative risk analysis Management risk Industry risk Business risk Concentration risk Economic condition Foreign exchange impact Company condition Technology

53

5 Cs of Credit

THE 5 Cs

Assessing basic credit worthiness of a customer 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
54

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

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 as commitment. 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 proceeds
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MANAGEMENT RISK

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 must the 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 performance and bottom line.

56

MANAGEMENT RISK

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 must the 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 performance and bottom line.

57

SWOT ANALYSIS ON BUSINESS RISK

STRENGTH

WEAKNESS

OPPORTUNITY

THREATS

58

LOAN MONITORING PROCESS

Drawdown Collection Monitoring loans Red flags Reviews Frauds

59

CREDIT DISBURSEMENT

1. 2.

Pre-Disbursement ( Before drawdown) Post-Disbursement ( After Drawdown)

Introduction Once documentation is completed either by the entrusted solicitor or the financial institution (FI)s staff, the credit administration officer or compliance officer has to ensure 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 the documents and disbursing the loan. This is to maintain impartiality and objectivity in ensuring the FIs security and interest are protected.

60

SOLICITORS ROLE At the time of taking legal action, third parties who offer security or guarantees sometimes file a defence stating that they had not been properly informed of the purpose of the loan for which they had offered security or guarantee. Disputes also arise when thumb prints are not properly taken and guarantees are dated on the day the guarantor was overseas although the guarantee had actually been signed on another day. These situations arise when the documents are signed in the presence of the credit administration 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 the borrower 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 the FI 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.

61

PRE DISBURSEMENT

Completion of documentation Documents 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 on the 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 borne by the borrower. A documentation checklist is often included in the banks policy manual as a reference source for lenders. Possible documents required by financial institutions:

62

PRE DISBURSEMENT

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

63

PRE DISBURSEMENT

Support documents Letter of Guarantee(ii)Life policies General / fire insurance policies

Searches Land search Bankruptcy search

64

POST DISBURSEMENT

Types of covenants Misuse of funds can lead to losses to the borrower and thereafter non-payment of the loan. Other factors can also lead to the eventual non-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 covenants can result in the loan being recalled. Events of defaults Failure 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 covenants Loan proceeds cannot be used for purposes other than that intended for in the approval of the loan.
65

POST DISBURSEMENT Loan administration (annual review and renewal) Except for term loans, most credit facilities are granted on a yearly basis and reviewed for renewal. This again provides an opportunity for the credit administration officer 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 to the 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 when funds are disbursed against undertakings to deliver the documents); Developing and maintaining management information about items such as documentation problems and the lenders performance; and Maintaining follow-up for the necessary insurance documents.
66

POST DISBURSEMENT

Summary Loan disbursement is an important element in developing a sound commercial portfolio. It involves preparing and executing loan documents that comply with all applicable regulations 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 the borrowers 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 also responsible for following up on documentation necessary to secure collateral and for providing reports to management.

67

LOAN CLASSIFICATION

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

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Red Flags-Warning signs Account operations

Cheques issued in rounded figures Customer having difficulty in payment Customer may be a loan shark Cheques banked in rounded figures Debtors having difficulty paying Possible Payment from loan sharks

Heavy cash transaction when business is done by cheques Evidence of kiting

69

Red Flags-Warning signs Account operations

Persistent delay in interest servicing Cheques issued with insufficient funds (Hand to mouth living ) Deteriorating banker customer relationships Transaction taking place at busy time.

70

Red Flags-Warning signs Business operations

Frequent change of auditors No management succession No proper accounting records Longer collection period Reduced profit trend Increasing gearing Increased bad debts

71

Red Flags-Warning signs Unusual transactions

Banking in of cash at close of banking hours Banking in cash amounts that do not justify business.

Accommodation

Creating bills of exchange (Especially Banker Acceptance ) for raising funds without genuine trade transactions

72

CALCULATING COMMON FINANCIAL RATIOS

Profitability

Profit after tax /capital

Profit after tax /sales

Gross Profit /sales

73

Calculating common financial ratios Liquidity

Current Ratio Current assets /Current liabilities

Acid Test Ratio Current assets- Stock /Current liabilities

74

Calculating common financial ratios

Leverage

Gearing Ratio

Debt/Equity

75

Activity ratios

1 Total assets turnover Sales/fixed assets = 2 Inventory turnover

Cost of good sold/Inventory 3 Average collection period Accounts receivable x 365/Sales

76

CAUSES OF FRAUD

1. Poor supervision or control 2. Lack of understanding of seriousness and consequence 3. Non compliance to procedure 4. Indifferent attitude of staff 5. Systemic weakness 6. Staff shortage

77

TYPES OF FRAUD

Credit frauds Fictitious borrowers Manager opening fictitious account granted credit and withdrew the funds Conversion of Term Loan to over draft facility Non existent company

Double financing the same asset

78

TYPES OF FRAUD

Collateral Over valuation To obtain higher loan Non existent property Bank financed the building of a house on another land Unauthorised release Title released by mistake Part title released leaving the other title unrealisable Forged documents Forged current account statement

79

TYPES OF FRAUD

Disbursement Wrong disbursement Wrong lot numbers

False claims Architects certificate

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WRITING A CREDIT MEMO

Executive summary Why should you lend Main Memo Purpose Facility Rationale Background and operations Financial analysis Risk Analysis Security Conclusions and recommendations Appendix Terms and conditions Directors profiles Financial spread sheets Others
81