slike bài giảng quản trị ngân hàng chương 5 l ending policies and procedures - managing credit risk

Factors determining the mix of bank loans Characteristics of market area : most lenders are chartered to serve selected markets where they are located as suburban community residentia

William Chittenden edited and updated the PowerPoint slides for this edition.

CREDIT POLICIES AND PROCEDURES: MANAGING CREDIT RISK

Chapter 5

Key topics

2. Factors affecting the mix of loans made

3. Regulation of lending

4. Creating a written loan policy

5. Steps in the lending process

16-2

Types of loans made by banks

 Real estate loans

 Commercial and industrial loans

Loans outstanding for U.S Banks (2007)

16-4

Factors determining the mix of bank loans

 Characteristics of market area : most lenders are

chartered to serve selected markets where they are

located as suburban community (residential real estate

loans, automobile loans, credit for home appliances) or

central city (business loans for inventory, equipment

purchase, business payrolls)

 Lender size : legal lending limit to single borrower.

 Larger banks → wholesale lenders

 Smaller banks → retail credit

16-5

Factors determining the mix of bank loans (cont.)

experience and lending policy to make large numbers

of commercial and industrial (business) loans

prefer to make loans bearing the highest expected

returns ( highest net yields : real estate & commercial loans)

examination and reviewed and many are restricted or

even prohibited by law.

16-6

Regulation of lending: CAMELS rating system

Asset quality

have minor weakness

weakness or showing dangerous

concentration of credit in a borrower/industry

16-8

 Doubtful loans : carrying a strong probability of loss

 Loss loans : uncollectible or unsuitable to be called as

bankable assets

16-9

Regulators’ use of market forces

Because the quality of examination information

decays very quickly regulators are starting to use

market forces and private market discipline (e.g

borrowing costs, stock prices) to monitor bank

behavior

16-10

Quick quiz

1 Why is lending closely regulated by authorities?

2 How loans are classified by risk level in VN? What

is the purpose of loan classification?

3 What is the CAMELS rating and how is it used?

Loan classification

1 Pass/Current: Loans for which borrowers are current in meeting

commitments and for which the full repayment of interest and

principal is not in doubt.

2 Special Mention : Loans with which borrowers are experiencing

difficulties and which may threaten the authorized institution's

position.

3 Substandard: Loans in which borrowers are displaying a definable

weakness that is likely to jeopardise repayment.

4 Doubtful: Loans for which full collection is improbable, the

authorized institution expects to sustain a loss of principal and/or interest, taking into account net realisable value of collateral.

5 Loss : Loans that are considered uncollectable after all collection

options (such as the realisation of collateral or the institution of legal proceedings) have been exhausted.

Establishing a good written loan policy

1 Goal statement for bank’s loan portfolio

2 Specification of lending authority of each loan

officer and committee

3 Lines of responsibility in making assignments

and reporting information

4 Operating procedures for soliciting, evaluating

and making loan decisions

5 Required documentation for all loans

6 Lines of authority for maintaining and reviewing

credit files

16-13

Bank’s written loan policy (cont.)

7. Guidelines for taking and perfecting collateral

8. Procedures for setting loan interest rate

9. Statement of quality standards for all loans

10. Statement of upper limit for total loans

outstanding

11. Description of the bank’s principal trade area

12. Procedures for detecting, analyzing and

working out problem loans

16-14

Steps in the lending process

1. Finding prospective loan customers

2. Evaluating a customer’s character and sincerity

of purpose

3. Making site visits and evaluating a customer’s

credit record

4. Evaluating a customer’s financial record

5. Assessing possible loan collateral and signing

the loan agreement

6. Monitoring compliance with the loan agreement

and other customer service needs

16-15

The Six basic C’s of lending

serious intent to repay loan

contract

 Cash – ability to generate enough cash to repay

loan

borrower

how would loan be affected by changing laws

and regulations

16-16

Common types of loan collateral

 Proceeds of collateral sale is to cover loans

 Collateralization gives lenders a psychological

advantage over the borrower

claim standing superior to claims of other lenders

and the borrower’s own claim.

 Procedures for establishing a perfected claim

depends on the nature of assets and laws of the

place where the asset reside.

16-18

Common types of loan collateral

Safety zone

 Loans exposing to risk should be protected by

1 Deposits maintained by the borrower

2 The borrower’s expected profits, income or cash

Information about consumers

 Credit bureau reports

 Experience of other lenders

 Verification of employment

 Verification of property ownership

16-21

Information about businesses

 Financial reports supplied by the borrowing firm

 Copies of board of director’s resolutions or

partnership agreements

 Credit ratings – Dun & Bradstreet, Moody’s,

Standard & Poor’s

 New York Times, Wall Street Journal, other

business publications

 Risk management associates (RMA), Dun &

Bradstreet industry averages

 The world wide web

16-22

Information about governments

 Credit ratings assigned to government

borrowers by Moody’s, Standard & Poor’s,

Fitch

 Web

16-23

Lending the old fashioned way? (box)

 New lending model

 Financial innovations, such as securitization, and

their effect on lending mix and policies

(“streamlined” loans)

 Newer lending paradigm or back to the basics?

 An increased coordination among financial

regulators in different countries

16-24

Quick quiz

1 What is the role of a loan policy to a lending institutions?

2 What are the differences between Accounts receivable

and Factoring as loan collateral?

3 What are the differences between Personal Property

and Personal guarantees as loan collateral?

Accounts receivable

 Account receivables are used as collateral and loans are repaid when the buyers pay their debts

 Most lenders do not require a business plan or tax

documents to make this type of loan

 Lender calculate a loan-to-value ratio, differing from

lenders to lenders

 Some lenders may refuse to finance accounts that have aged beyond 90 days, or may assign a lower

percentage to older accounts

 If a loan goes into default, the lenders may seize the

receivables used to secure the loan

http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P10_3710

 A fee is charged equal to a percentage of the invoices purchased,

generally 5% The factor may retain 20% of invoice before paying full amount when getting fully paid by the buyers.

 Factoring is a low value short term financing forms It involves the

purchase of invoices, for an amount less than $10,000 an 90-120 days payment terms

 After shipping your goods or services, the factor purchases the invoices, and advances cash to you company

 Normally conducted in a recourse basis: factors can recover payment from the sellers if the buyers refuse to pay.

 Factoring provide liquid assets to small business.

http://www.tapchiketoan.com/ngan-hang-tai-chinh/thi-truong-tai-chinh/phat-trien-nghiep-vu-factoring-nham-da-dang-hoa-hoat-dong-cua-ngan-hang-o-vie.html

Personal Property and Personal guarantees

 Personal Property: the borrower is also the property owner

 Personal guarantees: the borrower (the

business entity) is NOT the property owner

Parts of a typical loan agreement

interest rate, repayment terms,…

make credit available in return for a commitment fee

sold if the loan is unpaid.

 Affirmative : borrower is to take certain actions

 Negative : borrower is restricted from doing

certain things without lender approval

16-29

Sample loan covenants

acquisitions without bank approval

 No sale, lease, or transfer of more

than 10% of existing assets

 No change in senior management

 No additional debt without bank

approval

 Borrower must maintain following financial ratios:

Current ratio >1.0 Days receivables outstanding <50 days Inventory turnover >4.5 times

Debt to total assets <70%

Net worth >$1 million Fixed charge coverage >1.3 times Cash flow from operations >dividends + current maturities of long-term debt

 Certified financial statements must be provided within 60 days of end of each fiscal year

 Borrower will maintain $500,000 key man life insurance policy on company president, with bank named as beneficiary

 Bank will be allowed to inspect inventory, receivables, and property periodically

 Borrower must pay all taxes and government fees, unless contested in good faith, and comply with all laws

 Borrower must inform bank of any litigation or claim that might materially affect its performance

 Borrower must maintain all property in good condition and repair

Parts of a typical loan agreement (cont.)

 Borrower guaranties and warranties : borrower

guarantee that information supplied in the loan

application is correct

 Events of default : specifying

 actions or inactions by the borrower that would

represent a significant violation of loan agreement

 Actions that the lender is legally authorized to

take in order to secure the loan

16-31

Loan review

 Examination of outstanding loans to make sure

borrowers are adhering to their credit agreements, the bank is following its own loan policies and to

handle problem loans

 Loan review should be kept separate from credit analysis, execution, and administration

 The loan review committee should act

independent of loan officers and report directly to

the CEO of the bank

16-32

Loan review procedures

1 Carrying out review of all types of loans on a

periodic basis

2 Structuring the loan process

 Record of borrower payments

 Quality and condition of collateral

 Completeness of loan documentation

 Evaluation of borrower’s financial condition

 Assessment as to whether loan fits with

lender’s loan policies

16-33

Loan review procedures (cont.)

loans

economy or industry experiences problems

16-34

Warning signs of problem loans

1 Unusual or unexpected delays in receiving financial

statements

2 Any sudden changes in accounting methods

3 Restructuring debt or eliminating dividend

payments or changes in credit rating

4 Adverse changes in the price of stock

5 Losses in one or more years

6 Adverse changes in capital structure

7 Deviations in actual sales from predictions

8 Unexpected and unexplained changes in deposits

16-35

Loan workouts

The process of resolving a troubled loan so the

bank can recover its funds

16-36

Loan workout process

1 Goal is to maximize full recovery of funds

2 Rapid detection and reporting of problems is

5 Estimate resources available to collect on loan

6 Conduct tax and litigation search

7 Evaluate quality and competence of management

8 Consider all reasonable alternatives

16-37

Questions & Problems

1 Why is lending so closely regulated by authorities?

2 What sources of information are available today that loan

officers and credit analysts can use in evaluating a

customer loan application?

3 What is loan review? How should a loan review be

conducted?

4 What are some warning signs to management that a

problem loan may be developing?

5 Problem 3, 4 and 5 (page 540-1)

William Chittenden edited and updated the PowerPoint slides for this edition.

CREDIT POLICIES AND PROCEDURES: MANAGING CREDIT RISK

Chapter 5