Credit Policy

UNITED BANK OF AFRICA (UBA)
November 2006
November 2006
INTRODUCTION
TABLE OF CONTENTS Page

5 5 6-7 7-9 9 - 11 12 - 13
SECTION 1: GENERAL CREDIT POLICIES

1.1 1.2 1.3 1.4 CREDIT POLICIES GENERAL CREDIT PRINCIPLES APPLICABLE ACTIVITIES GENERAL CREDIT FACILITIES 1.5 CREDIT PROCESS
SECTION 2: ROLES AND RESPONSIBILITIES AND APPROVAL AUTHORITIES SECTION 3: RULES GOVERNING EXTENSION OF CREDIT
3.1 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.2 3.3 3.4 3.5 3.6 3.7 3.7.1 3.7.2 3.7.3 3.8 3.9 SANCTIONING PROCEDURES OVERVIEW DISCRETIONS OTHER APPROVAL REQUIREMENTS CREDIT PROGRAMS CLEARING RISK CREDIT ANALYSIS STANDARDS FINANCIAL APPRAISAL OPERATING PERFORMANCE LIQUIDITY DEBT SERVICE EXCESS POSITIONS EXCESSES UNCLEARED EFFECTS EXCESS APPROVAL AND REPORTING MONTHLY REPORTING OF SANCTIONED FACILITIES CREDIT PROCESSING RESPONSIBILITIES
14 14 14 15 - 17 17 - 18 18 18 19 - 21 21 - 22 23 - 24 25 - 27 28 28 28 28 - 30 30 30 - 31
SECTION 4: RISK AWARENESS

4.1 4.1.1 4.1.2 4.1.3 4.1.4 MONITORING INTRODUCTION MONITORING INTERNAL BANK INFORMATION MONITORING EXTERNAL INFORMATION MONITORING RESPONSIBILITIES 32 32 32 - 36 36 - 40 40 - 41
SECTION 5: REMEDIAL MANAGEMENT 5.1

OVERVIEW AND OBJECTIVES 5.2 WATCHLIST 5.2.1 IDENTIFICATION OF WATCH LIST ACCOUNTS 5.2.2. WATCHLIST RELATIONSHIP MANAGEMENT RESPONSIBILITY 5.2.3 STRATEGY SHEETS 42 43 44 44 44
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5.2.4 5.2.5 5.3 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 5.3.6
5.3.7
QUARTERTLY RETURNS SECURITY NON-PERFORMING ADVANCES ACCOUNT MANAGEMENT RESPONSIBILITY DEFINITIONS STRATEGY SHEETS MONTHLY RETURNS TO RISK MANAGEMENT PROVISIONING WRITING OFF OF CLASSIFIED ADVANCES RECOVERY AND RELEASE OF PROVISIONS
45 45 45 45 45 46 46 47 47 47
SECTION 6: CREDIT RISK MODEL

6.1 6.2 CREDIT RISK RATINGS GRADING CHARACTERISTICS AND GUIDELINES FOR COMPLETION 48 48 - 50
SECTION 7: PORTFOLIO MANAGEMENT AND REPORTING

7.1 7.2 OVERVIEW AND OBJECTIVES MANAGEMENT REPORTING GUIDELINES 51 51 51 - 52
7.3
SECTION 8: SECURITY
8.1
8.2 Appendices
BACKGROUND TYPES OF SECURITY AND VALUATION
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53 - 62 63 - 91
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Introduction
INTRODUCTION:
Credit Risk is the current or prospective risk to earnings and capital arising from an obligors failure to meet the terms of any contract with the bank or to otherwise fail to perform as agreed.
The Credit Risk Policies and Procedures document the core credit policies for identifying, measuring, approving and reporting credit risk in United Bank of Africa Limited (UBA). These policies ensure compliance with the Banking and Financial Institution Act (2006) and Bank of
Tanzania Regulations.
These policies are established by the Bank and have been approved by the Board of Directors of UBA. Any subsequent changes to these policies must be approved by the Board Executive Committee to whom the responsibility for Credit Risk management is delegated. Any exception to the policies and procedures herein must be approved the Board Executive Committee through Head of Credit Risk Management. All exceptions, including rationale, must be documented, and must carry either an expiration date or review date. These policies and procedures replace existing Credit policies and procedures. This document will be updated periodically, as necessary, and the relevant pages replaced. This document is designed for easy use and reference by all members of UBA at all experience and responsibility levels who are directly and indirectly involved in the credit process. This includes senior management and internal auditors. These policies act as a cornerstone for credit training of all staff at all levels within UBA. Policy Document Structure: The document is in two broad parts as summarised herebelow: Section 1 The Policy Statements Section 2 7 Standards and Procedures
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General Credit Policies
SECTION 1: GENERAL CREDIT POLICIES 1.1: CREDIT POLICIES UBA has identified ten core credit policies that define the banks risk behaviour and that characterize its credit culture. The board of directors carry the ultimate responsibility of approving and reviewing the credit risk policies of the bank. These statements are summarised in this section: a) b) c) d) e) f) g) h) i) Business will be accountable in conjunction with Credit Risk Management for establishing and maintaining appropriate risk limits and risk management procedures for their businesses. There will be a single Responsible Officer for every obligor. Credit Risk policies will be established by Credit Risk Management, approved by the Board of Directors through the Boards Executive Committee (EXCO), and effectively communicated throughout the institution. The authority granted to individual credit officers to approve credit will be based upon consistent set of standards of experience, judgement, and ability. Credit Officers will be appointed by EXCO with delegated authority exercised through the Managing Director and Head of Credit Risk Management. Every obligor must be assigned a risk rating, in accordance with an approved Risk Rating Process. Consistent standards across UBA for origination, documentation and maintenance of extensions of credit are applied. Consistent approaches within UBA toward problem recognition, classification of problem credits and remedial action are applied. UBA will maintain a diversified portfolio of risk assets. Limits will be maintained, including concentration limits by industry, maturity, currency and other parameters from time to time identified as being relevant. The policy includes target markets, diversification and concentration of the credit portfolio. A comprehensive set of credit risk data must be reported into the risk system, in an accurate, complete and timely fashion.
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1.2: GENERAL CREDIT PRINCIPLES All business, which UBA undertakes, must meet the following fundamental tests before taking other elements into consideration: a) The Banks credit posture is inherently conservative and must adequately reflect the balance between risk and reward. b) Credit should only be extended for known purposes which have been identified and agreed with the borrower. c) Credit should never be extended where the borrowers business or ethical record is doubtful or where illegalities are suspected.
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d) Credit should not be extended where the known sources of repayment are unclear, unproven or open-ended. e) Credit should not be extended in unfamiliar markets or industries. f) Credit should not be extended where agreed repayments are totally reliant on all economic factors working in the borrowers favour. g) The primary source of repayment should be from identified flows of cash from normal business operations with security being regarded only as a secondary source of repayment. h) Concentrations of risk and all exposure should be calibrated to risk. i) j) Lending must closely reflect the Banks business strategy. If at all possible, lending transactions should be priced, structured and secured in such a manner that they are capable of being sold down to a third party, should we so decide.
k) Foreign currency lending must have take-out clauses, which will enable the Bank to switch to domestic currency at short notice. Foreign currency lending will be undertaken only in instances where a borrower has identified foreign currency income streams or has foreign currency based repayment source. 1.3: APPLICABLE ACTIVITIES United Bank of Africa shall extend facilities to reputable commercial customers on transactions related to domestic and foreign trade and commerce, but within laid down industry and individual exposure limits as may be agreed from time to time. This may include the financing of: a) b) c) d) e) f) g) h) i) Wholesale and retail trade, including the export and import of goods and commodities. Manufacturing, including the processing of commodities and raw materials and the manufacture of finished or semi finished goods. Financial, insurance and other services. Building, construction, electricity and water generally including construction and purchase of residential and commercial real estate. Transport, communication, freight and the general storage and movement of goods. Aircraft finance may be considered with specialist input and approval at Board level. Hotels, Tourism and Tour Operators. Personal lending but mainly on a pre-agreed packaged product basis. Agriculture. Business and professional services
Specifically excluded from consideration are loans for: a) b) Speculative or non-productive purposes Arms and armaments
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c) d) e) f) g)
Gambling. Shipping finance. Pornography. Illegal activities. Other purposes as may be laid down from time to time.
1.4: GENERAL CREDIT FACILITIES Within authorized lines of credit, the following may be made available: A Short Term Commercial Credit
Priority will be given to short-term, self-liquidating lines of credit which may encompass a) The issuance of commercial letters of credit and guarantees, the discount of domestic and export two-name paper and the granting of domestic and foreign currency loans, overdrafts and advances for the purpose of: Financing imports, exports and domestic trade Working capital finance Seasonal agricultural finance The purchase or discount of documentary or clean drafts on banks and firms outside Tanzania and similar instruments on banks or firms within Tanzania. The negotiation of sight or usance drafts under letters of credit established by other banks of suitable standing where limits are in place Term Credit
b) c) B
Term Credit with tenors exceeding five years outside established product profiles must be approved by the Head, Credit Risk Management, who shall monitor that tenor exposure is within set limits. Term credit may be extended to finance the following: a) The purchase of machinery and equipment for commercial, industrial and agricultural purposes b) The purchase, expansion or long term increase in the working capital of a business c) The purchase of real estate d) The purchase of vehicles N.B. i) Term Credits are to be secured by first legal charges on real estate and/or debentures and/or other fixed assets and/or working capital assets and/or chattel mortgages or other
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ii) C
acceptable collateral including guarantees. Collateral is subject to outside independent appraisal satisfactory to the Bank and is to be properly and adequately insured to the satisfaction of the Bank with the Banks interest noted thereon. It is the policy of the Bank that no disbursements will be allowed prior to the perfection of all security documentation. Credits to Individuals
Credit to individuals should be targeted at the middle to top end of the personal banking market especially executives and staff of our commercial clients. Notwithstanding this, short-term personal loans or temporary overdrafts, may be made to individuals on a secured or unsecured basis in accordance with normal banking practice. It is however the Banks preference that such lending should as far as possible be packaged lending undertaken by the use of a scoring approach. This is covered by the Personal Banking products profiles, which are attached to this Credit Policy Document. D Credits to Local and Overseas Banks
The Bank may issue or confirm clean documentary letters of credit for banks for which an approved line of credit has been established. The Bank may also place short-term deposits with local or foreign banks within approved lines of credit. E Foreign Exchange Dealing and Money Market Placements
The Bank may undertake foreign exchange and money market placements in foreign and local currency within authorised dealing and placement limits and under the overall control and responsibility of the Head of Treasury. F Real Estate Loans
Subject to overall prudential limits that are set from time to time, it is the policy of the bank to make loans for the construction or purchase of residential or commercial real estate. Real estate, both commercial and residential, may be taken as collateral for credit facilities granted for other acceptable purposes. Bridging loans may also be considered with a defined take-out from an acceptable long-term lender or take out within the Banks mortgage lending programme. G Syndicated or Club Credits
The Bank may lead or enter into syndicated credits with reputable local and foreign banks and other reputable institutional lenders (e.g. Insurance companies) but must carry out its own appraisal in a robust fashion as though it was in a sole lender situation
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Guarantees
The Bank may issue bid and performance bonds, customs bonds, shipment and other guarantees of a normal commercial nature. Extreme care should however be taken with such instruments to avoid open-ended exposures which do not have a defined maturity date. Such guarantees should have maturity not exceeding three years and be subject to normal collateral requirements and in some cases, preferably be cash covered I Loans to Directors and Staff
These may be made but as laid down in the separately issued Employee Loan Policy Document and specific Bank of Tanzania Prudential Guidelines or as may be updated from time to time. J Problem Credits
The Bank may enter into any type of legal credit arrangement deemed necessary to ensure better support for the collection of problem loans. Such action will normally be subject to report to the Board Executive Committee K Lending to Governments
The Bank is permitted to invest in local and foreign currency, in Treasury Bills and other Government paper subject to separate approved credit lines. In general, the policy will be to maintain an adequate liquidity ratio as dictated by law and sound banking practice and to maintain an investment portfolio with adequate distributions of maturities to provide the necessary liquidity. This will be actively managed by the Banks Assets and Liabilities Committee (ALCO), which meets monthly and at other times as and when required. 1.5: CREDIT PROCESS A Background / Purpose
The purpose of this section is: To clearly lay down the principles governing lending decisions and credit approval authority. To establish a mechanism of thresholds below which credit approval authority may be vested in managers within business units, and To establish a procedural framework within which the credit approval process will operate, and in doing so, provide some necessary definitions.
Credit approval for all exposures should be separated from loan marketing, analysis and structuring. There is also a need for universal dedication to total quality management by all lending
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and credit officers. Credit Risk Managements ability to speedily turn round will be largely influenced by the quality and integrity of Credit Requests (CRs) submitted by the Business Units. A primary objective will be to ensure that roles and accountabilities are clearly defined and that respective business and credit management disciplines are complementary and supportive whilst ensuring that objectivity and independence of judgement are maintained. The overall aim must be to manage the Bank's credit risk in a safe and professional manner and one that is consistent with our stated business objectives. This can only be achieved through a structured and efficient process that is implicitly understood and respected by all involved in the management of credit risk. B Definitions
A common credit language is essential if the credit process is to function efficiently, effectively and without ambiguity. The key definitions to be used within UBA are as follows: a) b) Credit Officer - Any officer who approves a Credit Request (CR) within delegated authority. Credit Accountability - The holding to account of a Credit Officer or a Responsible Officer for management practice, judgement, negligence, professionalism or lack of integrity which places the Bank in an avoidable position of unacceptable credit risk. Credit Analysis - A process of examination and assessment whereby risks in any credit situation are identified, measured and subjected to tests of acceptability. Credit Analysis is a pre-requisite to the approval of credit based products, is integral to any Credit Request and is the responsibility of business units. Credit Approval - A properly sanctioned authority to incur Credit Risk exercised by a Credit Officer. Integral to Credit Approval is Credit Analysis that vets for accuracy, coverage, perceptiveness, reasonableness and soundness of judgement. Appraisal is a pre-requisite for a considered professional opinion leading to the final credit decision, is integral to Credit Approval and is the responsibility of Credit Officers whether domiciled in Business Units or Credit Risk Management. Credit Authority - The properly delegated authority to approve Credit Risks exercised by an individual officer. Credit Request (CR) - A request for a Credit Approval ordinarily incorporating a full Credit Analysis and submitted in a standard format as laid down by the Bank. Credit Responsibility - The responsibility of all officers, but especially senior and business unit managers, to ensure that their respective operations and subordinates manage Credit Risk in a prudent and professional manner and in accordance with laid down principles, procedures and policies and with due regard for the need to avoid excessive customer, counterparty and sectoral concentrations.
c)
d)
e) f) g)
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h) i)
Credit Risk - The probability of loss of income and principal arising from failure of a customer or counterparty to meet promptly and in full their obligations to the Bank. Dual Control - The principle that requires all Credit Requests to involve more than one competent officer. The purpose of Dual Control is to ensure the accuracy and honesty of essential facts and opinions as represented. Excesses - Credit Risks which exceed amounts specified in an approved Credit Request (CR), or which arise when no Credit Request has been authorised by a Credit Officer with sufficient Credit Authority. Limit Breaches - Unauthorised departures from the terms and conditions under which a Credit Request has been approved, other than excesses, or where the facility has expired. Responsible Officer - An officer from a business unit who recommends and accepts Credit Accountability for a given Credit Risk and signifies this by signing the Credit Request. The Responsible Officer must take full responsibility for the proposed credit and should not sign for the preparation of a credit request and on the basis of recommendation by another officer. The Responsible Officer is usually the Relationship Manager.
j)
k) l)
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Roles and Responsibilities and Approval Authorities
SECTION 2: ROLES AND RESPONSIBILITIES AND APPROVAL AUTHORITIES: Roles and responsibilities are detailed throughout these policies. Below is a high level summary of significant roles and responsibilities for certain individuals or groups. Board of Directors a) b) c) Approving risk management policies. Approving material policy exceptions. Approving certain extensions of credit as required by these policies.
Head of Credit Risk Management a) b) c) d) e) f) Establishing after consultation with business heads, UBA risk management policies, standards and practices for the approval, measurement, reporting, monitoring, limiting and analysis of risk. Establishing a risk management culture that promotes good analysis, judgement, flexibility and balance between risk and reward. Establishing UBA risk limits Establish risk reporting requirements. Approving certain extensions of credit as required by these policies. Managing the portfolio on non performing loans.
Credit Risk Analysts a) b) c) d) e) Support corporate side of business in writing credit requests and other kinds of requests. Providing independent review and approval of certain extension of credit as required. Performing proactive risk management of transactional and portfolio activities. Ensuring risk management policies, standards and practices are adhered to by the businesses they support. Assisting in identification, classification, and management of problem credits.
Head of Corporate Banking a) b) c) d) e) f) Marketing new business and managing existing business to enable the bank realize the revenue targets which are prescribed. Managing their portfolio in accordance with the set standards for portfolio quality. Establishing a risk management culture that promotes good analysis, judgement, flexibility and balance between risk and reward. Recommend the appointment of Credit Officers. Ensuring that extensions of credit are within all applicable limits and within established risk and return criteria. Ensuring that processes exist for the identification, classification and management of problem credits.
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Roles and Responsibilities and Approval Authorities
Credit Officer A Credit Officer is an individual who has been granted a specific level of authority to approve extensions of credit on the basis of experience, proven ability and specific duties and responsibilities. Responsible Officer The Responsible Officer is usually the Account Relationship Manager and is responsible for ensuring the coordination, execution and monitoring of extension of credit, from early consultation through approval to maturity, including: a) b) c) d) e) f) g) h) Serving as primary interface with the client Ensuring complete, accurate and balanced assessment of risk in the credit request. Coordinating the approval process, managing information flow to/from the client. Ensuring that clear communication between UBA and the client is maintained, and that internal approvals are consistent with client expectations. Ensuring compliance with related policies, as referred to throughout these policies. Ensuring that approval documentation is complete. Ensuring that legal documentation is complete, consistent with internal approvals and properly executed. Managing their portfolio in accordance with the set standards for portfolio quality.
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Rules Governing Extension of Credit
SECTION 3: RULES GOVERNING EXTENSION OF CREDIT 3.1 SANCTIONING PROCEDURES 3.1.1 Overview. Credit Approval is the documented acceptance by Credit Officers of the credit risks in a credit facility. Credit approval is primarily the responsibility of the Responsible Officer and is always required for the establishment of a credit facility. Due diligence requirements for approval of credit are enumerated later in this chapter. a) Every extension of credit must be approved by at least two authorized Credit Officers, one of whom must have a covering limit, and one of whom must be from Credit Risk Management. Specific Product Programs may set a separate approval process. b) Each credit officer has a credit approval limit associated with it that establishes the maximum amount for which that level of credit officer may give final approval. In some cases, credit officers may have no credit limit, but have some credit related responsibilities and authorities. Credit approval limits are shown in the Credit Facility Approval Grid below c) All authorities granted must be in compliance with the various policies and guidelines as laid down. These will also be subject to change by the issue of updated notice of delegated discretionary powers. d) To achieve the stated objective of calibrating authority to perceived risk, the credit authorities now granted are intrinsically linked to Credit Risk Ratings. (See Remedial
Management section).
3.1.2 Discretions a) Single Borrower Limits UBA is restricted, by The Bank of Tanzania to lend to any one connection a maximum amount of 25% of core capital as per the Credit Concentration and other Exposure Limits Regulations, 2001. Exposure against Single Borrower Limit is measured as the outstanding amounts (including Funded and Non-funded exposure). Discretionary Powers Discretions are as laid out below. These discretions are personal to the credit officer and not the position. They will be reviewed against experience, ability, sound judgement, maturity and perceived expertise of the personnel concerned.
b)
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Credit Facility Approval Grid Approval Level Board of Directors EXCO/Credit Risk CBA N.K. Mchechu B.E. Hamisi Head of Corporate Head of Institutional Clients Relationship Manager Credit Analyst Approval Limit >TZS 800m >TZS200m-800m TZS 200m TZS50m Recommends Recommends Recommends Recommends
In addition the following requirements must be met: 1) Every extension of credit must be approved by at least two authorised Credit Officers, one of whom must have a covering limit, and one of whom must be from Credit Risk Management. Each credit shall be managed by a Responsible Officer who is usually the Account Relationship Manager. Specific Product Programs may establish a separate approval process. 2) Credit Officers may only approve credits for amounts that fall within their specific delegated authority. PERSONAL AND INSTITUTIONAL BANKING CUSTOMERS. Personal and Institutional Banking customers will be restricted to use of standard packaged products as approved in specific product programs. Any exceptions must be forwarded to the Heads Personal and Institutional Banking who will seek approval from Credit Risk Management in line with the existing credit approval grid. The guidelines for preparation and approval of credit programs are as enumerated herein. 3.1.3 Other approval requirements Connected Accounts Total facilities, for the sake of determining Approval Level, shall include facilities to all connected accounts. Connected accounts include related entities including the parent entity and its majorityowned or effectively-controlled entities. It should not include facilities to affiliates unless the borrower effectively controls or provides support (guarantee) to the affiliate, or there is a material economic relationship in either direction, as determined by credit approvers. Total facilities include facilities for which the borrower provides a guarantee that is one of the primary sources of repayment or one of the principal considerations in the approval of the facility. When submitting a Credit Request for approval it is essential that any facilities for connected parties are included to ensure that the Approver of facilities is aware of full exposure of the Bank to a particular Group or connection.
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The following are examples of connected accounts: When facilities are extended in a parent/subsidiary relationship. Customer has facilities in his sole name and also in a business where he is sole proprietor. Majority shareholder of a company has facilities in his private name at the same time facilities marked for the company. A number of individual companies with facilities where there are common directors or shareholders or their associates. Where accounts are cross-guaranteed. Where a common guarantor guarantees accounts. Where a customer with facilities also guarantees another customer with facilities. Where there is common security between accounts.
There may be other possibilities and in the case of uncertainty reference should be made to Head of Credit Risk Management for guidance. New or Increased facilities Any increase to total facilities must be approved based on the new total facilities amount as per the credit facility approval grid. Annual Reviews All credits relationships are subject to periodic reviews. In most cases a full credit review is performed annually. In certain circumstances it may be performed less frequently. A full credit review must include the credit memorandum standards as described below. Approving credit officers may determine that it is not necessary or not applicable to the borrower and/or nature of the transaction to write a full credit review, and that determination is documented. If an interim review is required, approving credit officers may determine that the interim qualifies as the full credit review to run for a full year. Approval Expiration The approval of a credit facility for a specific transaction is valid for 90 days, unless specifically approved otherwise. A credit officer from Credit Risk Management can approve extension for up to an additional 90 days. If the transaction has not been booked during that time frame, the transaction must be re-approved at the requisite level. Temporary Extensions A periodic review cycle may be extended for up to 90 days.
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Material Change When an established credit facility undergoes a material change in terms or conditions, e.g. increasing facility amount, lengthening of tenor, material relaxation of collateral structure (materiality to be established by Credit Risk Management), total facilities must be re-approved in accordance with the Credit Facility Approval Grid. Re-allocation of Facilities Two Credit Officers may approve any reallocation from an approved facility where the borrower, exposure type (funded and non-funded), and tenor are pre-established in order to establish or increase another facility. One of the Credit Officers must have a covering limit for the amount of reallocation. Release of collateral The release of collateral before the corresponding commitment is cancelled or repaid requires the approval based on the Credit Facility Approval Grid. After the corresponding commitment or exposure is cancelled or repaid, approval must be obtained from Credit Risk Management. Waivers or amendments to existing legal documentation Requests to waive or amend the provisions contained in existing credit agreements must be considered carefully. Such requests must obtain an approval as per Credit Approval grid. 3.1.4. Credit Programs Where a product has unique and / or unusual risk characteristics (Dealer Finance, Supplier Finance, Collateral Management Structures, Asset Backed Finance, Leasing, Cash Covered Facilities etc), a Credit Program that documents product-specific credit approval requirements is required. The Credit Program must; Articulate how the proposed program fits into the Banks business strategy and specify the target market or customer segment the program will support. Highlight and justify any deviations or exceptions from Credit Policies. Define major risks and mitigants of the business activity. Identify the acceptable risk taking criteria. Include limits on the size of the Program as well as any other appropriate parameters. Define a Process to ensure compliance with any applicable Program Limits. Establish Risk Reporting requirements. Include Risk/Return criteria Establish rules for approving transactions or lines of credit, including roles and responsibilities and approval rules.
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Describe any specific documentation standards. Include the Risk Rating Process applicable to obligors covered under the Credit Program.
Extensions of credit under the program must be reported as specific exposures in the credit systems. Consultation may be required to ensure a good understanding of legal, accounting, taxation and operations issues which would impact on the proposed program. Approval of the Credit Program should follow Credit Approval Limits as per the grid above. 3.1.5. CLEARING RISK Clearing risk arises when UBA makes cash payment to a customer before it can confirm that reimbursement has taken place, as in the case of an uncleared cheque. It is possible to reduce clearing risk by not making a payment until receipt of reimbursement is confirmed. Eligible customers This service should only be given to first class customers in response to competitive pressures. It is not to be generally offered as a product and must not be extended to classified accounts. Annual review For customers where we have agreed clearing risk limits, an annual review should be undertaken to ensure that the service is still appropriate. A brief report should be submitted to Credit Risk Management confirming that account operation of these accounts remains satisfactory and seeking confirmation that the service may continue. This should avoid individual credit appraisals or lengthy reporting. 3.2: CREDIT ANALYSIS STANDARDS It is to be stressed that the Credit Request plus supporting documentation should include short, concise remarks preferable in bullet form. It is important that all relevant factors are included. However, details not related to the application and repetition should be avoided. The use of the Credit Request (CR) format - Appendix IV should enable this to be achieved. Preparation of the CR Package is the responsibility of the Responsible Officer. When there are multiple Responsible Officers for a credit relationship, it is the responsibility of each officer to prepare a CR for their clients and then forward a completed package to the Control Unit for consolidation. The Control Unit is usually the domicile of the client relationship. The CR must be signed by the Responsible Officer and address all the issues indicated in the format in appendix IV.
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3.3 FINANCIAL APPRAISAL Financial appraisal forms one of the pillars in the assessment of credit risk. This section dwells in the various aspects of financial analysis standards and the various ratios one may look out for. 3.3.1: CAPITAL STRUCTURE 3.3.2 Companys Gearing Gearing is the relationship between the Tangible Net Worth of the business, and its liabilities. As gearing increases, the shareholders cushion reduces and there is a higher risk of failure. This is mainly because of higher debt servicing costs and an increase on the reliance on external influences (i.e. banks and creditors). For a Bank, a higher gearing figure also represents higher risk as, in the event of a business failing, it is less likely to cover the debt purely from the assets of the business. This is because asset book values are unlikely to be achieved on a forced sale basis, and the margin afforded by the Tangible Net Assets is small. It is also an indicator of a businesss capacity to grow and fund expansion. Low gearing gives a business greater flexibility than high gearing. 3.3.3 Common Gearing Ratios Net Gearing Gross Gearing Total Liabilities Gearing Adjusted Gearing Borrowed Money less Cash/Tangible Net Worth Borrowed money/Tangible Net Worth All Liabilities/Tangible Net Worth All Liabilities less Subordinated Debt/Tangible Net Worth plus Subordinated Debt
Net and Gross Gearing have limited value. They are mainly used for Covenant setting, thus ensuring that a business does not enter into other significant borrowing arrangements without the existing lender knowing about it, and to try and maintain an acceptable margin between the debt and Tangible Net Assets in case the business fails. Total Liabilities Gearing is a much better indicator of how much external capital a business relies on to trade. It also ensures that window dressing the Balance Sheet does not impact the Gearing ratio. Adjusted Gearing discounts any liabilities that could be considered quasi-capital such as Directors Loans or any other loans where the lender has formerly agreed to keep the liability within the business. Under these circumstances, it is probably more realistic to include these loans as capital as opposed to a liability.
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3.3.4 Benchmarking If data is available about other businesses in the industry, then this is a useful source of information. If a business is highly geared compared with the industry, then it is in a weaker position to respond to things like a price war, altered terms of trade or capital innovation. A lower geared business would be able to respond more positively and absorb any structural changes. Another way to benchmark is to consider what is good, bad or average across all businesses regardless of the industry that they are in. Broadly, the following rule of thumb applies for Total Liabilities Gearing: Very Poor Poor Average Good Very Good 400% 300% 150% 70% 50%
In addition to these benchmarking indicators, the trend is also likely to raise many questions. 3.3.5 Factors Influencing Gearing In addition to subordinated debt, there may be other adjustments that should be made to the elements within the Balance Sheet, ensuring that a more representative Gearing figure is calculated. A hidden Reserve or Deficit. This is as a result of asset value movements from the initial date of purchase. The most common example is property where it may have a book value that is 10 years out of date. The up to date value could significantly impact our view of the Gearing figure. Goodwill. This represents an Intangible asset that is unlikely to be realised on the break-up of the business. It appears when another business has been bought for a price above its asset value, in consideration for things like the trading name, or the customer base. Commonly, this is taken out of the Balance Sheet and deducted from the Tangible Net Assets before Gearing is calculated. Potential Gearing. If a business has substantial unused facilities, the un-drawn element could be added to the liabilities to show the potential Gearing position. 3.3.6 The Structure of the Balance Sheet So far we have looked at liabilities as a whole, but businesses also get into trouble because the structure of the liabilities within the Balance Sheet is incorrect. The most common example of this is where a business purchases a long-term fixed asset from cash flow. This could result in a shortage of cash with which to continue trading, possibly putting
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the business at great risk. Broadly, if long-term assets require funding then this should be on a long-term basis, with repayments linked in some way to the life of the asset. Similarly, stock is an asset that should be traded relatively quickly, so you would not expect a purchase of stock to be funded on a 10-year loan! 3.4: OPERATING PERFORMANCE 3.4.1 Sales An analysis of the sales position should not only consider the real position, but should also be considered in relation to the industry within which the business operates. A 20% rise in sales looks good in isolation, but against a 35% rise across the industry it looks poor. By considering the sales trend over a number of years can reveal a lot about the management, and can be used to start assessing whether many other movements within the Profit & Loss account and Balance Sheet appear reasonable. It is the base prompt for many questions. 3.4.2 Gross Profit Margin This is fundamental to the profitable operations of the business and it is crucial to look at the trend as opposed to one year in isolation. A declining margin must prompt questions as this may be a warning sign. Alternatively, it may be due to a deliberate policy of reducing prices in order to undercut the opposition and increase sales. If this works, evidenced by a higher Gross Profit figure, then there may be no need for concern regarding the Gross Margin provided all other key ratios are satisfactory and as long as the strategy is sustainable. If however, sales remain static, a declining margin is an unhealthy sign and should prompt investigation. Another deliberate policy may be to increase prices and hope that sales do not fall by a disproportionate amount. Here, the Gross Margin would rise as the unit sale prices increased, and total sales possibly reduced. If the Gross Profit is maintained at or above previous levels then this could be seen as shrewd management, as long as the policy is sustainable. A direct comparison with other businesses in the same industry could highlight a Gross Profit Margin that is below/above that commonly seen. Any significant variance should be investigated. Lastly, because stock is included within the Cost of Goods Sold calculation, the stock valuation will have a direct effect on the level of profit calculated. It is therefore important to understand the basis for the stock valuation, and its reliability. Applicable Ratio: Gross Profit / Sales
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3.4.3 Operating Margin and Overhead Expenses Calculating this margin allows a comparison year on year and against similar businesses within the industry, at an operating level. Basically, it is an indication of how much profit has been made purely from trading and before the cost of capital is considered. This is another fundamental ratio as it informs whether any strategy surrounding sales and the Gross Profit Margin has worked. Have alterations to the elements at the top of the Profit and Loss Account been reflected in higher bottom line profits? The analysis of the overhead expense in relation to sales helps us to establish whether overheads are being controlled in relation to how the business is progressing. We can look at regularly increasing overheads and ask the question are they really fixed? If overheads are increasing at a high rate and analysis of where the costs are increasing and why needs to be undertaken. Managements ability to control the business adequately may also be questioned. Applicable Ratios: Operating Profit/Sales Overhead Expenses/Sales
3.4.4 Net Profit Margin This margin evidences the extent to which the business can trade profitably on an on-going basis, after allowing for interest costs. Again, the year on year trend is important, as are industry comparisons. Applicable Ratio: 3.4.5 Other Issues The above are the main ratios that can be used to analyse the operating performance of a business. However, throughout our analysis of the accounts, we must always remember to look behind the figures. In particular, when assessing the Operating Performance, you should check that the profitability on which you are basing your analysis is sustainable over a number of years, and excludes profits of a one-off nature (i.e. extraordinary profits and losses). If you note any payments of a discretionary nature (such as directors pension contributions) you may decide that these should be discounted for the purposes of your analysis at this level. You should also check the performance of your company against its peers. It is also important to understand why the directors are managing the business in a given manner, particularly where discretionary payments are made. Is it sustainable from the business point of view? Profit Before Tax/Sales
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3.5: LIQUIDITY 3.5.1 Current Ratio and Quick (Acid Test) Ratio The Current Ratio gives an indication of a businesss ability to meet its current obligations, and therefore the higher the ratio, the better position the business is in, provided that the current assets can truly be considered liquid i.e. easily convertible into cash within a reasonable timescale. Broadly, the following rule of thumb applies for the Current Ratio: Very High High Average Low Very Low Applicable Ratios: Current Assets / Current Liabilities 3.5.2 Elements within the Working Capital Cycle Trade Debtors The control exercised by a business over the collection of its debts can be assessed using the Trade Debtor Turnover ratio. Analysis of this ratio can lead you to ask a number of important questions and assess how well the business manages its debtor book, and whether those debtors are likely to pay. Some common questions to ask when the ratio has deteriorated include: Has the business changed its credit terms to some, or all, of its customers? If so, what has driven this? Are there any bad debts distorting the overall figure? Is debtor collection efficient? If slow payers are not chased for payment then the ratio will drift How well are the debtors spread? Over reliance on a few customers can make a business particularly vulnerable to slow payers and/or the impact of bad debts How does the trend compare with other businesses in the same industry? Deterioration in the ratio is not necessarily a bad thing, but it does warrant further investigation and an explanation. Similarly, whilst an improvement in the ratio is generally seen as good, it may mask other issues like a cash flow problem; the business may be pressing its customers to pay Liquid Current Assets / Current Liabilities 3.0 2.5 1.6 1.1 0.9 The Quick Ratio, whilst similar to the Current Ratio, considers only those assets that will soon turn into cash (commonly Cash and Debtors, but not stock). The Ratio expresses the degree to which a businesss most liquid assets cover their Current Liabilities. Broadly, the following rule of thumb applies for the Quick Ratio: Very High High Average Low Very Low 1.3 1.0 0.7 0.5 0.3
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early so that it can satisfy pressing Creditors. If this is the case, then you are also likely to see a deterioration in both the Current and Quick ratios. Applicable Ratio: Trade Creditors An assessment of credit taken by the business is aided by calculating the Trade Creditor Turnover. Analysis of this ratio will help you to assess the businesss financial position with its suppliers. As this relates to purchases of stock and/or raw materials, the calculation is based on the value of purchases during the year, adjusted for opening and closing stock. This is commonly referred to Cost of Goods Sold (COGS). If the Financial Statements of a business show direct labour in COGS, then this should be excluded from the calculation. Any substantial increase should be discussed with the customer. Common questions include: How well spread are the creditors? Dependence on one or two main suppliers can cause difficulties if they change their terms of trade. If the Trade Creditor Turnover is increasing, why is this? It may be that the business has a liquidity problem and is delaying paying its creditors until the last minute. Applicable Ratio: Stock Effective stock management is important. Where as Trade Debtor Turnover and Trade Creditor Turnover are subject to external influences, stock control is very much down to management. There is little point in buying stock in January that will not be sold until December as this ties up valuable Working Capital. Stock management can be assessed by calculating the Stock Turnover. This indicates the average number of days the stock is held. When assessing stock there are a number of issues to consider: What does the business do? The type of business should determine how long stock is held for i.e. a fruit seller will not have stock outstanding for 3 months. Compare the Stock Turnover with similar businesses in the same industry How much of the stock is saleable? Sometimes obsolete stock can inflate the stock figure when in fact this portion of the stock valuation is worthless. In this situation, obsolete stock should be written off Seasonality should be taken into account. As the Financial Statements are a year end snapshot of the stock situation, the figure may be inflated/deflated if the business operates in a seasonal business i.e. toys where the bulk of the sales occur just before Christmas Similarly one off contracts need to be taken into account if these cross the year end Trade Creditors/Cost of Goods Sold X 365 Trade Debtors/Sales X 365
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If in doubt about the stock, a visit to the business premises will give you a feel for how much is there, what is there? Applicable Ratio: 3.6: DEBT SERVICE 3.6.1 Interest Cover Ratio Interest Cover is a useful indicator of the business ability to meet its interest costs. The higher this figure is the better. A low ratio makes the business vulnerable to rising interest rates or falling profits, as well as having implications about the sufficiency of retained profits to finance other areas of the business and debt repayment. A high figure could suggest that the business has the capacity to take on additional indebtedness, perhaps to fund fixed asset purchases or expansion. Broadly, the following rule of thumb applies for the Interest Cover Ratio: Very High High Average Low Very Low Applicable Ratio: 7.0 5.0 3.5 2.0 0.75 Net Profit before Interest and Tax / Interest Paid Stock/Cost of Goods Sold X 365
3.6.2 Long Term Debt (LTD) Coverage Whilst the Interest Cover ratio is a good indicator, a business not only needs to cover interest costs but also debt repayments when they fall due. The Interest Cover ratio does not take this later requirement into consideration. The LTD Coverage fulfils this function in a simple way. Whilst not perfect, it does provide a good indicator as to whether a business can meet both its debt repayment obligations. Another advantage of this ratio is that it is forward looking; it looks to assess the debt coverage for the coming 12 months. It is basically asking the questions: If the trading performance remained constant over the next 12 months, would the business be able to repay its debts due within that period? and What is the margin of safety between the cash generated and the debt to be repaid? As this ratio is primarily looking at how much cash has been generated solely from profit, depreciation and any amortisation are added back to the profit as they are non-cash items that
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have deflated the profit figure. The Current Maturing Ltd figure is used, as this is the amount within the Creditors figure that is anticipated to be repaid over the coming 12 months. Applicable Ratio: Net Profit after Tax, plus Depreciation and Amortisation / Current Maturing Long Term Debt
This is a simple Ratio that assumes all other assets and liabilities will remain at a constant level. In reality this will not happen, so it would be best to use this ratio as an indicator in conjunction with the other Debt Service ratios, and to raise questions with the customer. 3.6.3 Cashflow Having considered Debt Coverage in terms of Profit, or Cash generated from Profit, this element looks at coverage from a cash viewpoint, taking into account asset and liability movements throughout the year. The information required to calculate the ratios is taken from a Cash Statement, or a Funds Flow Statement. Sometimes, these are in different formats, and sometimes a Statement is not available at all. Therefore, a simple structure is detailed below that could help you construct a cash flow statement, and provide consistency: PBIT plus depreciation Net Working Capital Movement Net Movement in other non Cash Current Assets and non Debt Liabilities Net Cash from Operations Less Interest Costs Less Dividends Paid Less Long Term Debt Repaid Less Capital Expenditure Net Cash Position before Finance Financed by: Capital New Borrowings: LTD STD Directors Cash Usage Net Finance Position From the P&L Account (Increase)/Decrease in Trade Debtors and Stock Increase/Decrease in Trade Creditors (Increase)/Decrease in Other Debtors & Prepayments etc. Increase/(Decrease) in Other Creditors, Tax, & Accruals etc. The sub total generated from above From the P&L Account Care: has the dividend been paid or deferred? Last years Current Maturing LTD From Fixed assets
Increase/(Decrease) in Capital Increase/(Decrease) in Total of LTD and Current Maturing LTD. Increase/(Decrease) in the Overdraft Increase/(Decrease) in Directors Loans (Increase)/Reduction in Cash Balances
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The Net Finance Position (NFP) should be a complete opposite to the Net Cash Position before Finance (NCP). For example, if the NCP indicated a cash negative position of TZS.1m after trading, interest payments and capital expenditure etc., then the NFP should equal TZS.1m surplus as these elements would have brought cash into the Balance Sheet to finance the cash shortfall generated from trading. 3.6.4 Financial Charges Ratio This ratio calculates the number of times the cash generated from the businesss operations covers Interest and Dividend payments. The higher the figure, the better. Low coverage makes the business vulnerable to rising interest rates and drains on cash, as well as having implications about the sufficiency of cash for other purposes i.e. re-investment into fixed assets. Broadly, the following rule of thumb applies for the Financial Charges Ratio: Very High High Average Low Very Low 3.0 2.2 1.75 1.3 0.9
Applicable ratio: Net Cash after Operations / Interest and Dividends Paid 3.6.5 Cash Coverage Ratio As with the profit ratios, whilst the Financial Charges ratio is a good indicator a business not only needs to cover interest costs but also debt repayments as well. The Financial Charges ratio does not take this later requirement into consideration. The Cash Coverage ratio fulfils this function. Debt repayments are calculated as being last years Current Maturing LTD. This was to be repaid within 12 months so we should assume that it has been, unless we are told or know otherwise. Broadly, the following rule of thumb applies for the Cash Coverage ratio: Very High High Average Low Very Low 2.5 1.7 1.25 0.8 0.4
Applicable ratio: Net Cash after Operations / Interest, Dividends Paid and LTD Repaid.
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3-7: EXCESS POSITIONS INTRODUCTION Accounts shown on the refer list as being in excess of agreed facilities, or overdrawn without prior arrangement should be regarded as a warning sign and must always be properly investigated by the Account Relationship Manager. 3.7.1 EXCESSES Approval to establish credit lines should be given in accordance with the credit approval grids. Temporary excesses can also occur from time to time in the operating accounts of clients, usually caused by failure to receive anticipated incoming fund, by drawing against uncleared funds or by misposting of funds to the wrong account. In some cases the client simply overdraws in excess or in absence of approved limits. Excess positions vary in terms of risk characteristics. TECHNICAL RISK ONLY EXCESSES An excess which is corrected by the receipt of CLEARED funds (for fate) on the day following the date of the excess (i.e. on the date the refer list is usually received at the branch) can be regarded as technical risk only. POTENTIAL RISK EXCESSES Any excess that cannot be classified as technical risk only is to be regarded as potential risk excess which will either fall within the Account Relationship Managers discretion or will be reportable in line with risk approval limits as amended from time to time. 3.7.2 UNCLEARED EFFECTS Paying against un-cleared effects carries the same risk as potential risk excesses and should be treated in the same manner 3.7.3 EXCESS APPROVAL AND REPORTING Any excess over limit must be pre-approved. Excesses that may go over 14 days must be approved as per the Credit Approval Grid. These approvals must be documented and submitted to Credit Risk Management to update systems. Other conditions for excesses; The account must not be in Watch list or classified. The account must not be subject to legal action. The discretion to pay excesses has not been withdrawn. No more than two previous separate excesses have occurred within the last two calendar months.
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The excess does not result in an exposure to the customer in excess of the Legal Lending Limit. Account is not past due. The Account Relationship Manager has been satisfied as to: Reason for the excess. Source of repayment Ability to clear within 14 days. A record must be maintained to ensure that excesses are cleared within the 14 days or a formal report prepared. Format: Excess Log: Appendix V For any excesses agreement must be sought as follows: Brief report to include: Customer name Account Relationship Manager Credit Officer Total exposure Balance Cleared position Terms & Conditions met? Reasons for excess Method of repayment
FORMAT: EXCESS REPORT: Appendix VI URGENT REQUESTS It is accepted that some excesses fall within the sanctioning authorities of EXCO/Credit Risk CBA or the Board of Directors. In many cases to await the next EXCO CBA or Board meeting would create a relationship problem with our customer (in theory cheques would have to be returned if in excess) it is therefore suggested that excesses above EXCO CBA limit may be signed off by Managing Director and Credit Committee. Those accounts reportable to the Board should be presented in a summarised form to the next appropriate Board meeting. FORMAT: SUMMARY EXCESS REPORT: Appendix vi TO REDUCE THE INCIDENCE OF EXCESS REPORTS Consideration should be given to seeking excess limits at time of submission of credit applications.
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If excesses are frequent, the level of facility should be reviewed. If we are happy to pay in excess of limit marked we should be prepared to formalise limit. If not we should not be entertaining excesses and the account controlled accordingly. Consideration should be given to seeking 'uncleared' limits for those accounts where this is a regular feature the level of credit appraisal will depend on the amount and spread of the uncleareds. E.g. A large cheque from a client of a building contractor undertaking a major contract should be appraised more thoroughly than a hotel which pays in 20 cheques a day from a spread of paying guests. In all cases however the risks involved should be fully considered. PAYMENT AGAINST UNCLEAREDS IS NO DIFFERENT IN RISK TERMS THAN MARKING AN OVERDRAFT LIMIT.
3.8: MONTHLY REPORTING OF SANCTIONED FACILITIES. As an additional control, Credit Administration Unit will prepare a monthly report on all approvals given during the previous month. 3.9: CREDIT PROCESSING RESPONSIBILITIES PROCEDURE IN DEALING WITH APPROVED CREDIT APPLICATIONS: Once the credit request has been approved, Credit Administration Unit (CAU) will: Ensure CR packages includes various materials that need to be reviewed by CAU with the documentation checklist (in appendix xv& xvi) duly updated and initialed by the Relationship Manager. Any exception in the checklist should be informed to the Relationship Manager immediately. Check that proper approvals have been obtained as per UBA policies. Prepare the Facility Letter, which will be signed by Head of Credit Administration Unit and Managing Director. Diarise return of the Facility Letter together with documentation required therein. If Facility Letter is not returned within the stipulated period, limits will be cancelled and facility called up unless approved otherwise. Ensure all security documentation is drawn up and executed in accordance with sanction, liaising with Banks legal advisors as appropriate. Instruct property valuers, if appropriate, in line with established policy on property valuations. Code the approval and amend as appropriate, the commitment and expiry date on Bank systems upon receipt of all necessary documentations and confirmation that they are in order Collect agreed facility fees. Maintain appropriate MIS to track receipt of financial information required as per approved CR i.e. Audited accounts, Borrowing Certificates, Debenture formula, Management accounts (Balance sheet/Profit & Loss), Personal Financial Statements etc.
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Track any conditions that are mentioned by the Credit Officers that need tracking are placed in the relevant tickler.
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Risk Awareness
SECTION 4: RISK AWARENESS 4.1 MONITORING 4.1.1 Introduction Monitoring of information from both internal Bank sources and from external sources is necessary for effective control. This section covers: Monitoring Internal Bank Information Overdraft excesses Account behaviour Other Bank Account behaviour Covenant Compliance Security Monitoring
Monitoring External Information Behavioural Customer Information Plans, Budgets, and Forecasts Management Accounts Audited Accounts
Monitoring Responsibilities
4.1.2. Monitoring Internal Bank Information Overdraft Excesses Excesses over an agreed limit should always be investigated. Inadequate assessment of excesses is often a major characteristic in cases where Banks lose money. In some cases investigation may mean that a higher limit is agreed, but in other cases investigation may result in a full reappraisal of the lending. Managers should be alert to the possibility of cross firing (see below) with overdraft excesses. If a customer appears to be reliant on a large overdraft, despite being profitable, consideration should be given as to whether the customer is overtrading. Overtrading Overtrading occurs when a business expands its sales turnover and total assets by a large amount without providing extra capital (new capital or retained profits) to support the
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expansion. Other causes are if a business reduces its quasi-capital base by repaying a loan without replacing it, or where inflationary pressures mean that retained profits are insufficient to pay for a replacement of fixed assets and stocks. Whatever the reason, a consequence is that, in spite of earning profits, the business relies increasingly on short-term credit, including bank overdraft. Some overtrading can be allowed provided that it is kept under control. Loss of control is evident when the business has increasing difficulties in paying bills on time, because of its increasing reliance on short term credit and/or bank overdraft and is eventually unable to do so. Uncontrolled overtrading does not happen overnight, but rather a business sinks gradually into ever-increasing liquidity problems, without the management realising that the problems are worsening. It can be difficult to persuade managers that their business is overtrading, and should not be allowed more credit by the Bank, so discussions with a customer must be handled tactfully. Apart from often reaching or even exceeding credit limit originally agreed, symptoms of overtrading are: A rapid increase in sales turnover A rapid increase in the volume of current assets (and possibly fixed assets) stock and debtor turnover periods may slow down, which means that the rate of increase stock and debtors will be even greater than the increase in sales turnover. Only a small increase in capital e.g. retained profits if any Most of the increase in assets is financed by credit, especially working capital finance and trade creditors. The payment period to creditors is likely to become much slower. The effects of overtrading including rising purchase costs (buying on best credit terms, not on price), lower gross profit margins (selling at a discount to win more sales), strained business relations with trade creditors, pressure on debtors, replacement of ageing fixed assets deferred and eventually difficulty in paying wages, salaries and taxes. At the time of collapse through overtrading, most businesses are still trading profitably. Remedies for overtrading are: Reduction in current assets apply better management to stocks and debtors, perhaps using factoring. Injections of fresh capital. Leasing or renting (instead of purchasing) fixed assets.
Account Behaviour This provides the best means for judging account liquidity trends, enabling consideration of the following areas: What is the worst balance trend?
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What is the best balance trend? Is there any evidence of hardcore (see below) developing? Is the average balance worsening? Is the account turnover out of line with the expected level of sales? If so, why? Is there a large and unexplained increase in turnover? Or is the account excessively active for the balances maintained and for the type of business? If so, this could indicate cross firing (see below) Has there been a change in the run of the account compared with previous years? Have seasonal swings vanished and/or is borrowing being taken earlier than previously? Hard-core
Hard-core is evidenced when an account never fluctuates into credit and/or the average debit balance deteriorates over time (possibly, but not always becoming a greater percentage of turnover) The account should be reviewed for signs of an imbalance between credit and debit turnover that may indicate deterioration in underlying terms of trade, or that the management of the business is not controlling working capital and cash is being tied up in current assets (refer Overtrading above). Alternatively, hard-core may relate to historic or current losses, or an element of financing which does not relate to current assets (e.g. capital expenditure) Where account behaviour shows turnover through the account running far ahead of an actual sales turnover of the business, this could be an indication of cross firing. Cross Firing
While there are many thousands of quite genuine inter-account and inter-company transactions daily, unless the balances are all CLEARED then there is a risk of cross firing. Cross firing is the creation of artificial credit on an account or series of accounts by taking advantage of un-cleared effects. An example as to how this can be done using accounts of three different banks or branches of a bank is set out below: DR Bank or Branch X Jan 1 Cheque from Z Jan 2 Cheque from Y Jan 3 Cheque to Y Jan 4 Cheque from Z Jan 4 Cheque to Z Bank or Branch Y CR 1,000 4,000 1,000 8,000 4,000 8,000 CR Balance 1,000 5,000 4,000 CR CR CR
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Risk Awareness
Jan 1 Jan 2 Jan 3 Jan 4 Jan 4
Cheque from X Cheque from Z Cheque to Z Cheque from X Cheque to X
1,000 4,000 1,000 8,000 4,000 1,000 4,000 1,000 8,000 4,000
1,000 5,000 4,000 8,000 1,000 5,000 4,000 8,000
CR CR CR CR CR CR CR CR
Bank or Branch Z Jan 1 Cheque from Y Jan 2 Cheque from X Jan 3 Cheque to X Jan 4 Cheque from Y Jan 4 Cheque to Y
If we assume that cheques clear on day three, then the actual CLEARED balances on the above are all nil. However, they all show an apparent credit of 8,000 and any or all of the above branches or banks could fall victim to cross firing by making a payment outside the ring of accounts, against the apparent credit balance. They could be making the payment against an actual nil balance and so a loss will be incurred. Cross firing can arise as a pure attempt to defraud the bank or as a despairing means whereby a business with liquidity problems can seek to stay within its limit. Once in operation, cross firing can expand rapidly. Undetected cross firing can involve the Bank in far greater losses than those made by individual bad debts. Although it its simplest form it will involve only two accounts, several individuals may pass cheques in a ring and there may be great difficulty in relating the transactions. Monitoring cross firing in a multi-banked complex group can be extremely difficult. Look out for chance revealing remarks or actions by the customer or for cheques payable to Cash or to parties recognisable as the drawers of cheques paid in, even though the names may be different. The cheques may be for round amounts, although clever operators do not confine themselves to round amounts. Bankers crossings on customers paid cheques may help linking up connections with other parties and with drawee banks of cheques paid in. If cross firing is suspected, each credit paid in and each cheque drawn should be referred, record drawers and payees names respectively, retain dishonoured cheques and advise the relevant department.
Other Bank Account Behaviour Information You should make full and effective use of any reports that are available to monitor trends on the bank account. Care must be taken to: Verify completion of security. Ensure that all conditions relating to maintenance of security in good order are satisfied.
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Risk Awareness
Ensure that advance is not diverted to purposes other than those for which granted. This may be revealed by inspection of vouchers, particularly cheques issued. Monitor that all conditions of sanction are observed. Discover and control any irregular practices e.g. issue of post-dated cheques, cross firing.
Covenant Compliance The basic questions to answer are: Are the covenants being met? Is there a trend emerging in the margin of compliance? Does this trend match the forecasts or projections? Take care not to ignore potential problem warning signs and always re-appraise an account before permanently relaxing covenants or waiving compliance with some or all of them to fit the customers position this should be regarded as tantamount to releasing security.
Monitoring of Current Assets held as Security Key points to include: What assets are charged by the Banks security documentation? How significant are preferential creditors and other prior claims? It is important to understand the underlying terms of trade e.g. When does a debtor become collectable. Is stock subject to retention of title clausing? Asset value in a break-up situation can be significantly lower than going concern values. Current Asset monitoring information can provide a good indication of current profitability and liquidity as well as confirming compliance with the security formulae. Monitoring External Information
4.1.3
Behavioural Customer Information Behavioural information about a customer will be available from interviews with the customer and visits to the premises. Visits are a particularly valuable way of getting to know the true business behind the figures on the Bank account and in financial statements. Visits also demonstrate an interest in a business and encourage customers to talk widely about their hopes and problems. They also give us the opportunity to gain a first hand impression of the physical organisation of the business and to meet all the members of a management team. If there is an unexpected request for an increase in facilities within a period of sanction, this indicates a failure in management to predict and plan adequately. On the other hand,
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Risk Awareness
if the Bank helps management to learn from their mistakes future request should be presented in advance. Assessment of management quality is the key area of importance. It is essential that management: Consider the future role of their business Understand the consequences of their decisions Are customer focused Are disciplined. Have balanced judgement. Identify any loss of market. The frequency of the visits will vary. The visiting pattern should not be determined by the customers geographical location and unannounced visits may be appropriate if the business is giving cause for concern. For medium sized businesses with more than one site, a visit to each of the major operating units is vital. The key to a successful visit or interview is good preparation. There should be a clear agenda of items for discussion and this will usually include an assessment of financial performance to date compared to budget and any alterations of future plans which the company proposes to make.
Business Plans, Budgets and Forecasts It is recommended that managers arrange for account reviews to take place when the customers forecasts for the next period are available. This is normally around six months before official publication of the year-end audited accounts, but the customer will nevertheless have a good view of what the year-end position is likely to be. Progress against forecasts should be monitored using management accounts and audited accounts with the focus on trends. In the initial lending appraisal the key underlying assumptions the company made in formulating its plans will have been identified. Management accounting information shows how these assumptions work out in practice. A failure, for example, to attain a planned level of gross margin or slower than anticipated collections from debtors can have fundamental implications for the companys working capital and hence its ability to repay its borrowing. Where key assumptions can no longer be regarded as valid, the management of the company should revise the plans. In light of the new forecasts, consider: Is the plan still viable? Have the assumptions in the new plan been sufficiently revised or do they still look optimistic?
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Information on performance to date should be sufficiently detailed to be able to judge the direction in which the key elements of the business are moving i.e. what are the trends? If the indications are that performance is flat rather than improving then this must be reflected in the new forecasts. Be particularly sceptical if there is no concrete evidence that matters are getting better but updated projections assume this.
Management Accounts Receipt of actual figures on a regular basis is an essential part of the monitoring process. By closely examining a customers performance it is possible to monitor the effects of nonattainment of forecasts and to take remedial action. The best management accounts include: Brief management comment (with reasons for variations from the forecasts and operating budgets). Profit and loss account. Balance sheet. Working capital details (aged debtor analysis, aged creditor analysis and stock). Additionally, the management accounts should enable the original cash flow forecasts to be updated and a rolling cash flow should be provided. Much of the monitoring of management figures which we carry out is in relation to security over Current Assets and such monitoring can provide us with an early warning of potential difficulties. Management accounts are a major source of information and means of monitoring probably the single most dangerous threat to the viability of a business i.e. cash shortages. They also allow comparisons of actual performance to be made against forecasts.
Note: Lack of comparisons of actuals against forecasts is a major characteristic in cases where banks have lost money. For most companies the level of sales will be the paramount key assumption. It is useful to monitor sales performance by making the following comparisons: Monthly actuals against budgets. Cumulative for the period to date for actuals and budgets. With last years figures.
Where manufacturing to order is an important element of sales, similar analysis to the above, of the companys future order book should be carried out as this will provide an even earlier indication of problems than sales figures.
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Risk Awareness
Cumulative figures are generally much more significant than the results for any single month. A variance in one month may well adjust itself in the next. It is the overall trends that are important. Any differences between management accounts and audited accounts should be explained. Management accounts can easily be adjusted to show a rosy picture simply by manipulation of the value of the stock to improve apparent profitability. If there is any doubt about the reliability of the management accounts, then it may be appropriate to obtain auditors confirmation of the figures on for example a quarterly basis. Management accounts (or projects) may give us a clear indication that the security margin may be (about to be) eroded, especially where there is a request to increase facilities. More security may be offered but it may be of poorer quality. Audited Accounts
The audited accounts should give an independently verified view of a business. However, the quality of audited accounts can be variable and they also only give a snapshot view of a business. There may be a difference in practical application of the auditors role between businesses where there are substantial outside shareholders and those where the directors are the proprietors and the main concern may be the saving of tax. It may also be the case that auditors will be subject to pressure to comply with their clients wishes because they cannot afford to sacrifice the fees the relationship generates. As well as comparing one set of audited figures with another they should always be analysed relative to any management accounts, to help form a view of the accuracy of management figures. Any major discrepancies should be clearly understood Group Accounts
It is essential to understand fully the Banks position when lending to a group of companies. Which company/companies is the bank lending to and from which company/companies does the Bank have security? Particularly where a substantial foreign parent is involved, subsidiary companies may have weak balance sheets. A subsidiary may be valuable to the extent that it represents a core business of its parent. The nature and extent of inter-company transactions/asset transfers, their rationale and what they mean in terms of the ownership of the assets must be clear. Answering the following questions may help in establishing exactly the Banks position and its exposure: Does the Bank hold cross guarantees, or cross guarantees and debentures from all the companies within the group?
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Risk Awareness
Which companies own the assets? Where are these assets held? To which companies is the Bank lending? Do these companies hold assets i.e. is the Bank lending to a subsidiary or to a holding company? What is the extent of inter-company trading? Which company has the greatest debt? Is this the company to which the bank is lending? What is the financial position of the entire group? Are other banks lending to the same company or to other companies? How much? What for? What other facilities do the companies have? Does the Bank hold guarantees from other banks? Do other banks hold security? What is the Banks total exposure to the group? What is the exposure to the holding company? What is the exposure to subsidiaries? If a subsidiary of the group or holding company fails, what is the Banks position? What will other lenders receive? Look for and understand substantial changes in the treatment of acquisitions, goodwill and depreciation. Remember if the Bank lends to a weak company without the benefit of guarantee support, in the event of insolvency the Bank would adopt the position of an unsecured creditor!
Industrial/ Sector information Credit Risk Department will keep track and monitor the performance of individual sectors in the economy and any threats that may pose a great risk to the Banks lending portfolio. Industrial/sector information will also form part of the monitoring activity within the Bank and will contribute towards determining the proposed limit exposures in the loan portfolio. 4.1.4 MONITORING RESPONSIBILITIES
The Account Relationship Manager is principally responsible for all aspects of account monitoring. Credit Administration Unit, however will keep a log to track that the requisite information is received on a regular basis by way of an approved memorandum from Team Leaders. Where customer fails to comply, Credit Admin will advise Account Relationship Manager (copy to Head of Corporate Banking and Head of Credit Risk Management). The Account Relationship Manager must then take appropriate action and seeks any appropriate waiver from the sanctioning body. If a waiver is agreed a letter to the customer must be sent confirming that a temporary or permanent waiver has been agreed. If we fail to do so we have set a precedent in permitting the breach and would have great difficulty in enforcing this covenant in future. Credit Administration Unit will NOT be responsible for analysing the information supplied; this will remain the responsibility of the Account Relationship Manager.
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Risk Awareness
To ensure that we are not overburdened with unnecessary reporting careful consideration should be given to the appropriateness of the covenants and the likely ability of the customer to comply. Examples: Requesting monthly management accounts by 15th of the following month is inappropriate if we know that historically they have taken 20 days to provide. Requesting Audited accounts within 180 days is inappropriate if historically they have taken 200 days. Debenture formula should allow a certain degree of tolerance to ensure breaches only occur in exceptional circumstances. Provision of directors' guarantees when we know the directors are employees of the company not owners. Annual provision of a schedule of directors' assets/liabilities where historically this has not been provided and where the guarantee is not a principal consideration in the provision of facilities.
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Remedial Management
SECTION 5: REMEDIAL MANAGEMENT 5.1 OVERVIEW AND OBJECTIVES UBA aligns the classification criteria as prescribed by Bank of Tanzania. In the determination of the classification of accounts, performance will be the primary consideration. All accounts shall be classified into five categories as follows: Especially Mentioned Sub-standard Doubtful Loss
The classification of an account reflects a judgement about risks of default and loss associated with the credit facility. The classification process establishes a consistent approach to problem recognition, problem labelling, remedial action and the initiation of credit write-offs. For the purpose of this policy classified refers only to those facility classified Watch or worse. It does not refer to Normal. Classification Definitions: Classification No. of days past due Especially Watch Mentioned Description Loans in this category may be currently protected and may not be past due but exhibit potential weakness which may, if not corrected, weaken the asset or inadequately protect the institutions position at some future date. Loans in this category are not adequately protected by the current sound net worth and paying capacity of the borrower. In essence, the primary sources of repayment are not sufficient to service the debt and the institution must look to secondary sources such as collateral, sale of fixed assets, refinancing, or additional capital injection for repayment. Loans in this category have all the weakness inherent in a substandard loan plus the added characteristic that the loan is not well secured. These weaknesses may make collection in full, on the basis of the currently existing facts, conditions, and value, highly questionable and improbable. The possibility of loss is high, but because of important and reasonable specific pending mitigating factors, the actual amount of loss cannot be fully determined.
Substandard
91-180 days
Doubtful
181-270 days
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Remedial Management
Loss
271 and more
Loans which are considered uncollectible or of such little value that their continuance as a bankable asset is not warranted shall be classified Loss. Losses will be taken in the period in which they are identified.
Managers at all levels are actively encouraged to identify and accept early warning signs within their portfolio and to refer to those who may be more experienced and add value in formulating strategy and the negotiating process. Early identification and referral is the most likely route to preventing provisions. On the other hand, suppression of problems can only lead to higher provisions, which is unacceptable commercially and in terms of individuals' performance. Referral should not be seen as a sign of weakness. No lender will be criticised if, having assembled the necessary facts at the time of the proposition, a reasonable judgement was made. However, criticism will be justified if a lending goes wrong because of a failure to spot obvious warning signs and/or to take remedial action. It is sometimes difficult to be objective as to the way forward, particularly if the original decision seems well founded. A more experienced lender in the branch can often provide an objective outside opinion. The Credit Risk Management department is ready to respond constructively with suggestions based on their wider experience. All too often their advice is sought too late and this may well result in losses being considerably higher than is necessary. The application of judgement and common sense is vital. However the use of the early warning questionnaire and the classification process will assist. 5.2 ESPECIALLY MENTIONED
Loans in this category may be currently protected and may not be past due but exhibit potential weakness which may, if not corrected, weaken the asset or inadequately protect the institutions position at some future date. The accounts under this classification are provided at 5%. PURPOSE The purpose of this process is to standardise the classification and management of the Especially Mentioned. OBJECTIVES To identify at an early stage, those customers where we believe difficulties may arise, allowing timely corrective action to be taken to minimise the risk to the Bank.
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Remedial Management
To focus more attention on and closely monitor the performance of these customers, ensuring that a clearly defined strategy for returning the account to Health is laid down in every case. To set out minimum standard actions. To obtain better information on the relative quality of our portfolio to assist in provision forecasting and resource management. 5.2.1 IDENTIFICATION OF WATCH LIST ACCOUNTS/USE OF EARLY WARNING QUESTIONNAIRES.
Warning signs must be identified at the earliest possible stage. It is therefore essential that Account Relationship Managers review their own portfolios frequently. To aid identification of accounts that are likely to be at most risk, early warning questionnaires (EWQs) are to be used. The EWQ is intended to focus management attention so as to encourage managers to identify warning signs themselves. The questionnaire has been devised (See Appendix XIII). This is to be completed: At the time of annual review of facilities and to be submitted with the credit application. On evidence of cash flow pressures (including return of cheques). Evidence of poor trading results. Adverse publicity. 5.2.2 WATCH LIST RELATIONSHIP MANAGEMENT RESPONSIBILITY
On classification of an account as Watch List the Account Relationship Manager should complete a strategy sheet. The recommended strategy has to be agreed with Credit Risk Management and Credit Portfolio Risk Management. Once agreed, the Account Relationship Manager continues responsibility for the ongoing management of the account. Any deviations from the strategy must be first discussed and agreed with Credit Risk Management. 5.2.3 STRATEGY SHEETS
A strategy sheet has been devised (See Appendix XIV). This is to provide a brief summary of the history, current position, exposure and future strategy of the watchlisted account. They enable accounts identified as being potentially at risk to be monitored and controlled more easily and enable staff unfamiliar with the file to quickly familiarise themselves with the salient facts. Whilst fundamentally they contain no new information, creating a strategy sheet is a discipline which ensures that a clear strategy is set and specific time scales within which certain goals are identified. Any classification upgrade must be approved by the Credit Committee. The responsible officer must immediately notify Credit Administration Unit to change the credit reporting systems.
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Remedial Management
5.2.4
QUARTERLY RETURNS TO CREDIT RISK MANAGEMENT
Corporate Team is required to submit a return for those watch list accounts within their team. These returns (See Appendix XIV) are to be submitted quarterly to Credit Risk Management, who shall actively track that these reports are received and duly approved at the levels stated above. 5.2.5 SECURITY
To minimise any potential loss and to ensure that recovery strategies are not hampered because of imperfect security, it is mandatory for all securities to be physically checked for correctness by external legal counsel at the time a watch list account is first identified. At this time a fresh schedule of securities should be drawn up and signed off by both the Account Relationship Manager and Credit Administration Unit. This should state that Security has been checked and was found to be in order. 5.3: NON-PERFORMING ADVANCES 5.3.1 Account Management Responsibility
Credit department have the responsibility for the management of all non-performing advances in the Bank. 5.3.2 Definitions
Non-performing advances are defined as all those facilities classified Substandard, Doubtful and Loss. Sub-standard: Loans in this category are not adequately protected by the current sound net worth and paying capacity of the borrower. In essence, the primary source of repayment are not sufficient to service the debt and the institution must look to secondary sources such as collateral, sale of fixed assets, refinancing, or additional capital injection for repayment. Doubtful: Loans in this category have all the weakness inherent in a substandard loan plus the added characteristic that the loan is not well secured. These weaknesses may make collection in full, on the basis of the currently existing facts, conditions, and value, highly questionable and improbable. The possibility of loss is high, but because of important and reasonable specific pending mitigating factors, the actual amount of loss cannot be fully determined.
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Remedial Management
Loss: Loans which are considered uncollectible or of such little value that their continuance as a bankable asset is not warranted shall be classified Loss. Losses will be taken in the period in which they are identified. 5.3.3 STRATEGY SHEETS
A strategy sheet has been devised (See Appendix XIV). This is to provide a brief summary of the history, current position, exposure and future strategy of the non-performing account. They enable accounts identified as being potentially at risk to be monitored and controlled more easily and enable staff unfamiliar with the file to quickly familiarise themselves with the salient facts. Whilst fundamentally they contain no new information, creating a strategy sheet is a discipline which ensures that a clear strategy is set and specific time scales within which certain goals are identified. Any classification upgrade must be approved by the Credit Committee and confirmed by Bank of Tanzania. 5.3.4 MONTHLY RETURNS TO CREDIT RISK MANAGEMENT
The responsible officer is required to submit a return for those non-performing accounts under their charge. These returns (See Appendix xiv) are to be submitted monthly for Substandard and Doubtful categories and Semi-annually for Loss, to Credit Risk Management, who shall actively track that these reports are received and duly approved. The monthly reports may satisfy the annual credit review requirement provided the Classified Reports are being prepared at the required frequency. Interest Suspension Interest on all advances classified as non-performing should be suspended. Penalty interest should not be charged for non-performing accounts. Returning an account back to accrual status requires Finance Department notification. Zero Interest Accrual Where interest is considered unlikely to be collected, it should cease to be debited to the respective non-performing account. Such an account will be placed on zero interest accrual status. This action will not however, constitute a waiver of interest, and outstandings on such accounts if required for whatever reason, should be inclusive of accrued interest which will either be calculated manually or supported by IT systems.
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Remedial Management
5.3.5
Provisioning
Responsibility for initiating and approving specific provisions lies with the Credit Committee to be endorsed by Bank of Tanzania. A specific provision is to be made at rates prescribed in the BoT Prudential Guidelines as shown below. Normal Especially Mentioned Substandard Doubtful Loss . 5.3.6 0% 5% 10% 50% 100%
WRITING-OFF OF CLASSIFIED ADVANCES
Every effort should be made to recover the full amount of principal, interest, fees and related expenses, even after provisions have been taken. Where it has been determined that a nonperforming debt is irrecoverable, consideration should be given to writing off this debt. Partial write-offs will normally apply where the debts are written down to the value of security held or estimated recoveries from the debtor. Any provisioning and write-off require notification to Finance Department in the month in which it occurs. 5.3.7 RECOVERY AND RELEASES OF PROVISIONS
Release of Provision: A release of provision will normally occur when borrower unexpectedly provides additional funds to reduce the debt or the realisation of security produces a higher amount that the calculation extended. A record should be kept detailing the source of funds which have allowed the release of provision to occur. Recovery of Amounts Previously Charged Off: Where a debt has been partially or fully written off and subsequently funds are received from the borrower, this will give rise to a recovery. A record of such recoveries should be kept detailing by name of borrower, the source, date and amount of any repayment.
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Portfolio Management and Reporting
SECTION 6: CREDIT RISK RATINGS 6.1: CREDIT RISK RATINGS UBA does not use credit risk rating method. It is proposed to introduce the Credit Risk Rating system based on a point scoring method. The score sheets are an integral part of the relationship documentation and are available for and subject to a regular audit for accuracy. The Credit Risk Rating does not take into account any underlying collateral security, rather it sets ratings at which full security is a prerequisite for doing business. It also sets ratings at or below which new business will not be undertaken except where this has been specifically approved. 6.2: GRADING CHARACTERISTICS AND GUIDELINES FOR COMPLETION Business Accounts a) Attached to this section is a copy of the Credit Grade Characteristics. This comprises of two distinct sections. The larger relates to business accounts in the widest format (Appendix i) and the smaller and more simplified one to personal lending (Appendix ii). Dealing firstly with business section, this comprises of three main sections viz. Financial, General, Management and Ability to Service / Repay. Each heading is divided into various sub-sections. The accompanying guide indicates the maximum number of items which may be taken from each section and highlights that not more than one item can be taken from each sub section. Following these laid down instructions, the Responsible Officer will be obliged to circle those characteristics in each section, which most accurately describe the relationship. Taking special care to recognize any negative figures, the resultant score should be transferred to the Summary Section. The individual scores should then be added up to arrive at an overall score. By matching this score to the accompanying grading matrix, you will arrive at the appropriate Credit Risk Rating. It will be incumbent upon the Dual Control Officer and Credit Officers to confirm their agreement with the Risk Rating or continue dialogue with the other involved officers until an agreement is reached. This is most important as these individual ratings will be used to arrive at a Weighted Average Credit Risk Rating (WACRR) for the Bank's whole portfolio which, in turn, will be used as a tool to track movements in the quality of our lending portfolio. The purpose of this risk rating system is to arrive at a Credit Risk Rating for the relationship based on the characteristics of the borrowing entity. For this reason, no account is taken of the underlying security. This ultra-cautious approach is justified by the past experience of our industry, which has shown that the realized value of security in any forced sale situation is often far removed from the expected.
b)
c)
d)
e)
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f)
All relationships which evidence a Credit Risk Rating of CRR A4 or below must be fully secured in accordance with our standing criteria. Not withstanding the above, we should, of course continue to seek suitable security for the higher quality categories. No new business should be entertained or sought where the Credit Risk Rating out turns at CRR A6 or below. Facilities that have a Credit Risk Rating of CRR B7 will be placed on the Watchlist. Facilities that have a Credit Risk Rating of CRR B8 will be considered as Substandard and interest will normally be taken into Interest Suspense Account. Facilities that have a Credit Risk Rating of CRR B9 will be considered as Bad and / or Doubtful Debts and 50% provided. Personal Lending
g) h) i) j)
a)
A separate and simplified approach is taken for what may be described as Personal Lending or lending to individuals. This is shown on the lower right hand of the accompanying Credit Characteristics Chart. It should be noted that in case of loans to employees guaranteed by a corporate client, the corporate client's Credit Risk Rating should be used. As with business lending, a record of the score sheet evidencing agreement by the approving officer should be maintained with the documentation and be available for audit. This section covers individual personal lending and should not be confused with any packaged credit scored consumer lending which is adequately covered in separately issued product profiles. No new personal lending should be entertained or sought where the Credit Risk Rating out -turns at CRR A6 or below. Personal lending which has a Credit Risk Rating of CRR B7 will be placed on the Watch List. Personal lending which has a Credit Risk Rating of CRR B8 will be considered as Substandard and interest will normally be taken into Interest Suspense Account. Personal lending which has a Credit Risk Rating of CRR B9 will be considered as a Bad and /or Doubtful Debt and a full or part provision will normally have been made or be anticipated.
b) c) d)
e) f) g) h)
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Treasury Operations a) Credit facilities under treasury operations shall have a separate evaluation criteria to determine the credit risk rating. The Manager, Treasury Operations shall be given a mandate to undertake this evaluation, advise the required limits and monitor the limits. Where necessary, Treasury Department will submit a proposal for lines of credit to Manager, Treasury Operations to allocate lines for a particular Bank or financial institution.
b)
Guidelines for Completing Credit Risk Rating Forms a) b) c) d) e) f) g) h) NB: Circle up to ten items from the "Financial" section. Circle up to three items from the "General" section. Circle up to three items from the "Management and Ability to Service/Repay" Section. Not more than one item may be circled from each sub-section within a heading e.g. "General" has three sub-sections and you may only pick one characteristic from each. Enter in the summary the number of points scored in each section, taking care where there are negative values. From the resultant total, find and circle the correspondent Credit Risk Rating from the grading matrix. Undertake the exercise as honestly and objectively as possible as you may need to justify the rating during audits. The score sheet should be retained on the credit file to facilitate future audits and to track changes in our risk perception of the relationship. In absence of an important scoring criteria (financial, general or management and ability to service and or repay) the lowest score in the category will be used.
Weighted Average Credit Risk Rating. a) This system enables us to more accurately track the overall health and quality of the bank's total lending portfolio - both in respect of outstandings and commitments. To enable us to do this, monthly returns must be completed by Credit Risk Management and placed before MANCO and the Board Executive Committee as per the format below.
A UBA CREDIT RATING A1 A2 A3 A4 A5 A6 B7 B8 B9 TOTALS B NUMBER OF ACCTS C COMMITME NTS IN TSH. MILLION D O/STANDINGS IN TSH MILLION E PRODUCT COMMITMENTS COL.A * COL.C F PRODUCT OUTSTANDINGS COL. A* COL.D G % OF TOTAL B H % OF TOTAL C I % OF TOTAL D J COMMIITMENT TARGET CAP %
100%
100%
100%
100%
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b) c)
The officer presenting the report should have the detailed computer print out of individual commitments and outstandings available for more detailed examination in need. The over-riding objective will be to witness an on-going improvement in the weighted average credit rating.
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SECTION 7: PORTFOLIO MANAGEMENT AND REPORTING 7.1 Overview and objectives Portfolio Management is an integral part of the credit process that enables the bank to limit concentrations, reduce volatility, increase liquidity and achieve optimum earnings. It does so by incorporating portfolio strategy and planning, performance assessment and reporting functions into one comprehensive management process. Responsibility for Portfolio Management lies primarily with the Business, with oversight and review by Credit Risk Management. In certain cases some portfolio management activities are carried out by Credit Risk Management, on behalf of the Business. Each Portfolio Management Plan should incorporate the following components that must be documented annually. Setting portfolio targets and concentrations Establishing target market, risk acceptance criteria and/or key success factors Monitoring the portfolio risk profile, risk-adjusted returns, risk concentrations and economic/market/competitive data. Identifying and analyzing trends and concentrations that could affect the risk and performance of the portfolio. Performing stress testing to the portfolio for the purpose of measuring expected losses.
7.2 Management Reporting It is critical to the successful implementation of these credit policies that the comprehensive set of credit risk data generated by the businesses is identified and communicated throughout the businesses and senior management. It is the responsibility of Credit Risk Management to define, construct and maintain an independent credit risk reporting framework for the Bank that effectively, consistently and meaningfully communicates portfolio exposures. The credit risk data and other data used to populate the independent credit risk reports should be subject to a reconcilement process to ensure integrity and should be timely, accurate and complete. It is the responsibility of the business to assist in the quality control process by reviewing the reports for reasonableness, consistency and completeness.
7.3 Guidelines a) To ensure the overall safety of the Bank, the make up of the lending portfolio must be managed and monitored at all times to avoid excessive concentration in any one of several industrial sectors. Equally, care should be taken to avoid over exposure on any one "name". Restrictions on the maximum exposure permitted to any one name geared to the bank's capital base are already laid down in the Banking Act and must be strictly followed.
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November 2006
b)
It is also essential that a similar exercise be regularly carried out in respect of commitments which the Bank has made which, in difficult times, could be fully drawn down. As well as fulfilling a prudential need, this exercise can also serve as a practical business planning tool in that, by adding a "target" sectoral makeup column, we are able to identify those sectors in which we would wish to increase or decrease the percentage of outstanding and or commitments. This, in turn assists in the development of both business and marketing plans by enabling us to more directly focus on the particular sectors in which we would wish to expand and drawing up suitable target names and objectives for our Account Officers. We are also able to track when we are nearing any caps which we may have placed on that sector and divert our attention to other sectors. It is obviously essential that these closely mirror the Bank's overall agreed Strategic Plan and its business direction. It must be recognized that this is a dynamic tool and it is imperative the target ranges and overall objectives are subject to regular review to ensure their continued appropriateness. Any changes will be subject to the approval of the Bank's Board of Directors and / or the Board Executive Committee and must carry the recommendation of Credit Risk Management. The sectoral weightings and a target range of weightings can be shown using the format below:
c)
d) e)
UBA LENDING BY INDUSTRIAL SECTOR

INDUSTRY SECTOR No.of A/cs A Agriculture Building & Construction Education & Health Financial Institutions Leasing Financing Manufacturing Mining & Quarrying Personal Power, Electricity & Gas Tourism & Services Trade Transport & Communication TOTALS Commitments Millions B Outstan d-ings Millions C % B % C Commit. Target CAP %
100
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Security
SECTION 8: SECURITY 8.1 Background The primary source of repayment for the majority of facilities will be cash flow generated from ongoing trading. Security therefore should be regarded as a safety net if things go wrong rather than the planned source of repayment. It is the policy of UBA that no advance is permitted until all documentation (subject to specific approval) is completed, executed, delivered and registered if necessary and all conditions precedent have been met. Responsibility for the completeness and content of legal documentation or for obtaining waivers or deferrals lies with the responsible officer. In addition to the above, at each annual review, the Credit Administration Unit must review all documentation held for the customer to ensure documents are complete, adequate, valid and complete the documentation checklist (see appendix xiv & xv). The Credit Administration Unit will also review all documentation prior to marking of limits, to ensure that documents are complete and in order. The Credit Administration Unit will be in charge of custody of security documents in a safe and secure environment. The book room containing security files must be under dual control. All facility letters must be in a pre-approved standard format that have been reviewed by external legal counsel and approved by UBA. 8.2 Types of Security and Valuation Listed below are brief comments on the more usual types of security. The list is not exhaustive nor is the content. Alternative security may be considered after reference to Head of Corporate Banking and/or Head of Credit Risk Management. Further guidance on content should be sought as required via Head of Corporate Banking and/or Head of Credit Risk Management. 8.2.1 GUARANTEES Definition A guarantee is a written promise, given by one person (the guarantor) to repay the liabilities of a second person (the principal debtor) should the later fail to meet his liabilities (the principal debt) to a third party (the beneficiary) in this case the Bank when called upon to do so. The guarantor has no interest in the contract between the principal debtor and the bank, except for the fact that the guarantor agrees to accept liability should the principal debtor fail to repay his debt.
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Security
Advantage Easy to complete. The security is of fixed value provided the guarantor remains good for the liability.
Disadvantage Value is dependent upon the worth of the guarantor. This will fluctuate during the life of the guarantee and actual value will be unknown until realization is actioned. Often proves difficult to realize. Valuation Benefit It is essential that a guarantee (or any other third party security from a company) must have the following: The guarantee must be given in good faith. There must be seen to be adequate benefit to the guarantor company giving the guarantee. Benefit must be specific to the guarantor company. It is not sufficient for the benefit to be to the group in general. Examples of adequate benefit for the guarantor company could be: Inter-company trading. Inability to trade without the principal debtor. Parent company guaranteeing the subsidiary (not necessarily the reverse). Reliance on the principal debtor for continued profitability. Principal debtor occupying premises owned by guarantor company where property may not be easily marketable if it were to fall vacant. 8.2.2 INDEMNITY An Indemnity clause is included in the UBA standard form of guarantee. It is perhaps relevant to comment on the difference between a guarantee and an indemnity as they have different legal characteristics. A guarantor is liable in a secondary capacity i.e. promises if the principal debtor does not pay, I will. Guarantees provided by an approved bank, within agreed limits can be considered good for reporting purposes. We can attach a security value of 95% of face value. Where a guarantee is taken from other than an approved bank, if supported by tangible security we can attach a value to the extent of the supporting security or the amount of the guarantee, which ever is the lower. If no supporting security, no value is attached despite a nominal value being stated.
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Security
An indemnifier is liable in a primary capacity i.e. promises I will ensure the debt is repaid.
8.2.3 LETTERS OF COMFORT Definition (See Appendix ix) A letter of comfort is a document confirming, to the Bank, support from a parent company to its subsidiary, for facilities to be provided by the Bank. Whilst it may contain legal obligations, it does not offer the same degree of protection as a guarantee and should therefore be only taken where it proves impossible to obtain a full guarantee. It should only be taken from large companies of international repute. Advantage Easy to take. Useful in cases where a guarantee is not possible because of Group policy or contractual restrictions to other lenders.
Disadvantage They are NOT guarantees. Intentions could be open to dispute. Legal remedies are uncertain.
Valuation No value can be attached but taken for moral purposes only. A facility supported by a Letter Of Comfort will therefore be regarded as unsecured/clean.
8.2.4 STANDBY LETTERS OF CREDIT A standby letter of credit issued in our favour by an approved bank within agreed limits can be looked upon as if it were a guarantee and indemnity from that Bank. 8.2.5 LAND The Bank recognises two forms of land tenure for security purposes. FREEHOLD Where the owner of the land has the right of ownership in perpetuity. The value of the land is variable dependent on market forces. For this reason properties should be revalued on a regular basis in line with Bank policy. (See Appendix x & xi).
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Security
LEASEHOLD Where the owner has the right of ownership for the outstanding term of the lease subject to adherence to terms and conditions included in the lease in particular the payment of land rent. Terms and conditions should be carefully reviewed when considering the acceptability of the lease as security. These could include: Forfeiture Clause. E.g. forfeiture of lease on bankruptcy of lessee. (Maybe when we need most to rely on security) Restriction on assignment or creation of sub-leases. Restrictive covenants. Onerous provisions e.g. periodic increases in rent. Tenants liability clauses. In addition to the variation in valuations due to market forces, it has to be considered that as the outstanding term of the lease diminishes, so does the value. This is more marked in short term leases. Advantage Relatively easy to charge.
Disadvantage Can be expensive to complete. Delays with registration. Can be difficult to realize dependent on marketability of property. Realization can be protracted, even more so if the cooperation of the owner is not forthcoming. Expensive to realize.
Valuation Land charged as security will only be regarded as approved if it has been valued in accordance with the Banks policy as follows: Panel of Valuers Only approved Valuers may be instructed to carry out valuations on behalf of the Bank. A list of approved valuers will be updated regularly by Credit Risk Management Department. (Appendix X) They will be appointed on the basis of professional qualifications, experience and level of professional indemnity cover held.
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Security
Instructions The valuer will be the agent of the Bank and not the customer. As the customer will be paying for the valuation, a copy will be sent to them for their records. Standard letters of instruction will be used to ensure the valuer is aware of the basis of valuation required. The letters will emphasis: Valuer is an agent of the Bank and as such should not get into discussion with the customer on the valuation. Valuations will be accompanied by a photograph of the property for easy reference. Valuations to include, open market valuation on the basis of an orderly sale within 6 months, forced sale valuation on the basis of the price anticipated at auction and insurance value to ensure level of insurance on the property is adequate.
Revaluations Revaluations should be reviewed at least every three years or more frequently if felt appropriate. If we are asked to waive this requirement any application for facilities should clearly state that the valuation is over 3 years old and therefore not in accordance with valuation policy. Comments Normal policy would be: Legal charge to be taken. A valuation report carried out in accordance with bank's policy as above. Revaluations should be reviewed at least every three years or more frequently if felt appropriate. A margin to be maintained between bank's advance against the property's current value. 8.2.6 LIFE POLICIES Advantage Easy to assign. Surrender value easy to ascertain. Should increase in value as premiums are paid. Easy to realize.
Disadvantage If premiums not paid policy could lapse or Bank may have to maintain payments. Validity of policy subject to accurate declarations by policyholder. Inaccurate declarations could result in policy becoming void. Dependent upon ability of insurance company making payment. Some policies not assignable e.g. trust policies / pension policies.
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Security
Valuation Bank will value on the basis of surrender value only. Where policy does not attract a surrender value, a Nil valuation will be assumed. (See page 65).
8.2.7 STOCKS AND SHARES Not all stocks and shares can be regarded as satisfactory security. Unquoted shares are likely to be difficult to sell and are difficult to value. A legal charge should be taken in all cases to ensure complete control. (A signed charge form and transfer form is not deemed acceptable as duplicate share certificates can be obtained and shares sold without the Banks approval). With the development of the central depository system (CDS), the Bank will forthwith cease to take physical share certificates. Advantage Central Depository System provides good title.
Disadvantage Price volatility makes it impossible to assess likely value at time of realisation.
Valuation Unless quoted on a recognized stock exchange, no value should be attached. Quoted shares are relatively easy to value. However value can fluctuate substantially and are affected by general marketability of shares.
Comment Normal policy would be: Only fully paid shares to be taken. Shares to be quoted on a recognised stock exchange. A margin to be maintained between limit and current valuation. Shares to be valued monthly or immediately upon release of price sensitive information. We should aim to have a balanced portfolio of easily marketable shares rather than dependence on one or two companies or companies where we know there is limited marketability of the stock.
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Security
8.2.8 CASH Advantage Easy to take. Easy to realize.
Disadvantage Exchange risk if in different currency to liability.
Valuation Easy to value. However regular revaluation needs to be undertaken if in a different currency from liability to ensure security cover is maintained. An agreed margin needs to be established. (See page 65).
Comment Proper consideration should be given to the likelihood of undue influence and satisfactory consideration if the funds are in name of a third party.
8.2.9 DEBENTURES Advantage Easy to take. Provides additional security in situations where the tangible security available is deemed inadequate.
Disadvantage Realization often far below expectations. Realization can be protracted and expensive.
Valuation Valuation of a debenture can be difficult and ever changing. Some important factors need to be taken into account when attempting to place a value of the assets tied up under a debenture. Assets in the company accounts are usually stated on a going concern basis yet the banks interest will be to establish recovery potential in a forced sale situation i.e. what will the Bank receive if the business fails. In liquidation potential buyers of assets will be aware that assets need to be sold quickly and forced sale values will probably be dramatically below market valuations. Stock could be subject to reservation of title.
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Security
Some assets may have no value e.g. contract debtors, work in progress, dead stock. Fixed assets may have a limited market. Realization costs / expenses will have to be deducted from sale proceeds. Receivership / liquidation costs need to be deducted from sale proceeds. Preferential creditors will receive priority on distribution of realization before holders of a floating charge.
Debenture formula A formula should be agreed in all cases except those where the level of other security is deemed adequate. Purpose (i) to establish a satisfactory security margin. (ii) to act as an alarm bell to trigger further enquiry. There is no set formula as much depends upon the quality of the underlying assets (as commented upon under disadvantages above). Managerial judgement will be required in ALL cases. Whilst based on book value the formula should be assessed on the likely recovery values. The formula will depend on the ability of the company providing reliable financial information. The agreed formula must be included in all facility letters. It is essential that regular monitoring take place preferably monthly. This enables us to monitor adverse trends and breaches. These are useful early warning procedures, which can identify trading difficulties caused by losses or diversion of funds from working capital to say capital expenditure. These should be discussed with the customer. In the event of breach of the formula consideration should be given as to whether action need be taken. E.g. reductions of limit, request for additional security, agree revised formula etc. (NB: a relaxation of the debenture formula is the same as a partial release of security and should be considered in the same way). Formulae must be realistic setting of appropriate formulas will be greatly assisted if we have monthly balance sheet projections for the company. If the initial cover is considered inadequate it may be appropriate to ratchet up the formula over a period of time until we reach the appropriate comfort level. Some examples of formulas are as follows. These are NOT set formulas but just to provide guidance: (i) Overdraft in the borrowers books to be covered three times by current assets, including twice cover by good debtors below 90 days. (ii) Overdraft in the borrowers books to be covered three times by stock. (iii) Overdraft in the borrowers books to be covered three times by good debtors below 90 days. 8.2.10 CHARGE OVER GOODS / PRODUCE. Advantage Relatively easy and cheap to take. Produce loans should be self-liquidating. Easy to get good title.
November 2006
61
Security
Disadvantage Produce loan documentation relates only to the underlying goods. (i) Perishable goods could become worthless. (ii) Heavy insurance and storage charges could accrue. (iii) Documentation must be detailed and accurate. Opportunities for fraud. Warehouse keeper has lien over goods for unpaid charges (unless waived). Possibility of reservation of title. Valuation Valuation sometimes difficult to establish. Market price volatility requires a good margin to be maintained.
8.2.11 TREASURY BILLS AND BONDS Advantage Easy to take. Easy to realize. Disadvantage Changes of yield. SECURITY LENDING VALUES Nature of Collateral Bank guarantees or standby letters of credit issued by acceptable names and covered by separate CRs. (1) Cash Deposit at UBA Government of Tanzania Securities. Marketable Securities (2)
Lending Value 90%
Revaluation Period Monthly
95% 85% 75%
Monthly in case of currency mismatch Monthly in case of currency mismatch Monthly 5 years 5 years 5 years
Real Estate Residential 70% Real Estate Industrial / Commercial 70% Agricultural land used for 40% commercial purposes DEBENTURES (3)
62
November 2006
Security
Receivables under 60 days Receivables 60 to 90 days Receivables over 90 Inventory Machinery and Equipment
70% 60% NIL 50% 50%
Quarterly Quarterly Quarterly Quarterly Quarterly
Notes: 1. Up to 90% if both interest and principal are covered. If interest is not covered separately, loan value should be reduced by interest estimated to be due until repayment or expiry of the guarantee or letter of credit (any exceptions to be approved by the Head of Credit Risk Management). Documentation must have a top up clause. Up to 85% if there is a currency mismatch. 2. Up to 75% of market value for securities regularly traded on a recognised exchange. To be revalued monthly or more frequently should the market conditions so dictate (to include foreign exchange market in case of foreign securities). 3. The Account Relationship Manager will recommend an appropriate Debenture formula (see guidelines above) to be monitored by way of the Borrowing Certificate and debenture record card. The value we attach will vary from customer to customer and given the inherent weakness in this type of collateral, the covenant tracking sheet will require the approval of an Officer of the Team Leader rank or above. Credit Administration Unit shall track that these sheets are received and escalate any exemptions. Other notes: 1.All credits not secured by a collateral as described above or not valued in accordance with the Bank's policy shall be considered CLEAN. 2.The above loan to value ratios are the standard for the bank. Any deviating rates must be documented and approved as such.
November 2006
63
Appendices
APPENDICES
Appendix
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (xvi)
Description
Credit Risk Rating for a Limited Company Credit Risk Rating for an individual Credit Application Credit Memorandum Excess Recording Log Excess Request Extension Request Short Form Credit Memorandum Examples of Letters of Comfort Approved property valuation firms Letter of instruction to valuers Early warning questionnaire Strategy sheet Documentation Checklist for Corporate Borrowers Documentation Checklist for Personal Borrowers Watch list sheet
November 2006
64
Appendices
Appendix (i) Section 6-2 : CREDIT RISK RATING FOR A LIMITED COMPANY Score Sheet Summery
Section Financial General Management & Ability to service/Repay Grand Total
Summary
Credit Risk Rating Matrix Score 90-100 Points 80-90 Points 65-79 Points 50-64 Points 35-49 Points 20-34 Points 19 Points or Less Interest in suspense Provision made or expected Risk Rating CRR A1 CRR A2 CRR A3 CRR A4 CRR A5 CRR A6 CRR B7 CRR B8 CRR B9
SECTION A FINANCIAL
1
Characteristics SALES GROWTH infl adj 25%+ 10-25%

0-10%
Score 4 3 0 -2 -4 5 3 0
Section 5
Characteristics DEBTORS SPREAD Single debtor above 10% outstandings Single debtor below 10% outstandings DEBTORS AGEING over 90days 10% and below 20% 30%+ CREDITORS SPREAD Single creditor above 10% outstandings Single creditor below 10% outstandings
Score
0 3 3 1 -2 0 3
Negative 10% to 0% Below Negative 10%

2
PROFITABILITY - ROCE Above 25% 10% to 25% 0-10%
7.
65
Appendices Negative 1-10%

Below Negative 10% 3
-2 -4 7 5 3 0 -2
8.
LIQUIDITY ( quick assets: current liabilities) Above 1.5 1-1.5 0.75-1 0.5-0.75 Below 0.5
CREDITORS AGEING over 90 days Below 10% 10 to 20%
3 1 -2 5 3 2 1 -1 -3
Above 20% + FINANCIALS
GEARING (Gross) Below 0.25 0.25 0.5 0.5- 1 1-2 Above 2 Insolvent 7 5 3 1 -2 -5
Financials show no material auditors qualification and adequate financial information and projections availed. Adequate financial information available ( historic & projected) Some difficulty in obtaining adequate & timely financial information Very difficult to obtain adequate &timely financial information Financial information not audited, unreliable or out of date ( over 12months since year end ) No balance sheet for limited company 10 STOCK Some evidence of stock obsolescence or unsaleability
-4
Total maximum =40 points.
SECTION B - GENERAL
Characteristics 1 INDUSTRY /PRODUCT Well established, diverse product range in stable industry with favourable outlook. Well insulated against recession As above fairly well insulated against recession Established enterprise in cyclical or very competitive industry Score 12 Section Characteristics COMPANY STATUS (cont.) Enterprise with undoubted corporate connections or ownership but lacking in formal support and/or adequate financial information Family business adequately capitalised Enterprise with important connections or powerful ownership but lacking in either formal support or reliable financials and/or showing a poor position for taxation or other reasons compared with obvious wealth of connections or ownership Enterprise without important connections may be newly formed or family business Score 3
9 6
2 1
Enterprise in a very competitive industry or cyclical industry. Has suffered
-1
66
Appendices setbacks but is now recovering Recently established enterprise but adequate strength evident Recently established enterprise or one with inconclusive financial track record in extremely competitive or cyclical industry that has been subject to recent severe downturn. Must be strong likelihood of recovery in the near future
3 1
Enterprise quoted on the stock exchange but whose shares would not be acceptable security
-1
3. Enterprise working to overcome current difficulties with prospects of eventual improvement -1
EXTERNAL CREDIT RATINGS Good standing on all credit checks. No slowness or other derogatory information Acceptable standing in credit checks. Minor slowness or other derogatory information may be present Slowness or other negative information indicated in credit checks Trade or market reports of a cautionary nature
3 2 0 -2
COMPANY STATUS Blue chip company with shares quoted on a recognized stock exchange and readily accepted as security for other loans Quoted company not blue chip, but shares accepted as security for other loans Enterprise with important/ powerful backing who support Industry leader but unquoted 10
8 8 6 Total Maximum =25 points Score 10
SECTION C MANAGEMENT and ABILITY TO SERVICE/REPAY Characteristics Score Section Characteristics Highly respected corporate 20 2 Good cash flow management record over management comprising qualified the last twelve months with smooth professional personnel in all functions coverage of all recurrent trade obligations including debt principal and interest. .Highly successful and respected 15 Satisfactory cash flow management record entrepreneurial management fully comfortably covering all recurrent trade supported by qualified professionals at obligations and debt interest. all levels Respected corporate management 12 Unsatisfactory cash flow management comprising qualified personnel in most record with frequent material cash deficits positions but evens out over a twelve-month period to cover all trade obligations and debt interest. Respected entrepreneurial 10 Poor cash flow management record with management supported by qualified persistent cash flow problems but with a professionals in key positions credible business plan to turn this position around in six months. Capable corporate management usually 8 Poor cash flow management record with professional and qualified, but lacking persistent cash flow problems and no some depth of experience in some credible business plan to reverse the
-4
67
Appendices operations Competent entrepreneurial management, professionally qualified and experienced but comprising mainly family members or associated or with strong reliance on one or two individuals. Succession may be a problem Entrepreneurial or family management considered generally adequate. Succession is a cause for concern Evidence of weakness but problems are being addressed Serious weakness as yet unresolved 6 3 situation in the short term. Unlikely to have any difficulty in repaying fully or making alternative banking arrangements if required.
2 -3 -5
Company likely to be able to make alternative banking arrangements if required. Demand for repayment might cause problems Immediate repayment on demand highly unlikely The bank is locked in. Repayment is unlikely in other than in the medium term. NB: this does not relate to term finance being repaid in accordance with arrangements.
3 0 -2 -4
Total maximum
=35 points.
Responsible Officer: Name and Signature..Date. Dual Control Officer: Name and Signature..Date.
68
Appendices
Appendix (ii) NAME OF BORROWER:

Characteristics Wealthy individuals of undoubted integrity where it can be reasonably substantiated that they are worth more than Ksh.100m a substantial part of which is liquid. Highly respected individuals of undoubted integrity where it can be reasonably substantiated that they are worth more than Ksh.50 million a substantial part of which is liquid. Highly respected customers usually professionals or well established and successful businessmen with a good track record for at least ten years. Respected customers living well within their means and staff loans. Average customer loans Customers living up to their means or suffering temporary setbacks which they should eventually overcome Accounts where sufficient doubt exists that interest is placed in suspense but for which provision has not been thought necessary. Accounts where partial or full provision has been made or where such is expected to be necessary before the end of the year Responsible Officer: Name and Signature..Date. Credit Grade CRR A2 CRR A3 CRR A4 CRR A5 CRR A6 CRR B7 CRR B8 CRR B9
Dual Control Officer: Name and Signature..Date.
69
Appendices
Appendix (iii)
Resp. Office Resp. Officer UBA XYZ LIMITED Credit Request Date C.R.R Account Strategy Last Review Date Next Review Date Nature Of Report NEW CEO Name Contact Contact Tel ANNUAL REVIEW INTERIM SHORT TERM EXTENSION EXCESS DOCUMENTATION Business Segment LAST SANCTIONED FACILITIES (TZS )
BORROWER INFORMATION Legal Name XYZ LIMITED Account No. Address City Directors
Customer Since Peer
Business Since
TYPE
LIMIT
BALANCE
INTEREST RATE
FACILITY TENOR
SECURITY
SUB TOTAL Connected facilities

TOTAL
PROPOSED FACILITIES (TZS)
TYPE
LIMIT
INCREASE / (DECREASE)
INTEREST RATE
FACILITY TENOR
SECURITY
SUB TOTAL Connected facilities

TOTAL
APPROVAL
RECOMMENDED BY: NAME SIGN ARM TEAM LEADER ENDORSED BY:
DATE
NAME
APPROVED BY: SIGN
DATE
70
Appendices
Appendix (iv)
Credit Memorandum
INTRODUCTION
REQUEST: Brief outline of what approval is being sought.
NOTATION ON APPLICATION If necessary give a brief explanation on why the request is being sought especially where the transaction is complex.
BRIEF HISTORY - Brief introduction of company - Shareholding structure Comment on the proposed capital structure if any
NB: Where the group structure is complex, an organogram can be included in this section. Management Directors Key Management Staff numbers Industrial relations
Product / Services, Market and Trading Outlook Brief comment on the industry. Description of the Products and/or services of the company Market Share Main Suppliers Main Customers Main competitors Key markets
Premises / Machinery / Vehicles

Main premises leased or owned Key assets/machinery Insurance Comment on sufficiency of assets for company performance.
71
Appendices
TRADING PERFORMANCE
Attach the following Moodys spreads:
DETAILED BALANCE SHEET DETAILED PROFIT & LOSS ACCOUNT RATIOS (From the Executive Summary)
FINANCIAL ANALYSIS:
Concise Analysis of the financial information presented. The comments should take into account material changes in the financial performance of the company and also a trend analysis.
BALANCE SHEET / PROFIT & LOSS
RATIOS:
Highlight the key issues Explain any significant changes
Significant movements in the following: a) Operating Performance Turnover growth P&L - Gross Profit - Operating Expenses/Turnover - Net operating profit/Turnover
b) Operating Efficiency Stock turnover period - Debtor Turnover Days - Creditor turnover period - Net operating turnover / Fixed assets c) Debt Service Coverage d) Liquidity Interest cover
Working Capital - Current/Quick Ratio - Turnover to Working Capital Gearing - Sustainable growth rate
e) Capital Structure
CASH FLOW Comment on adequacy of facilities and any significant movements in the cash requirement of the company
MANAGEMENT ACCOUNTS Where we have a debenture or where significant time has lapsed since last audited accounts a brief comment on the performance of the company Year To Date.
72
Appendices
PROJECTIONS Company strategy review Comment on performance against last years proposed strategy. Projected performance Expected sales turnover/Profitability New Developments expected in next 2 years Capex spend projected how financed Expansion plans
NB: If there is
(a) A guarantor (b) A parent company or important related company , an analysis of the financial performance of the company is required.
CONDUCT OF ACCOUNT
Account statistics for 12 months Debit Turnover Credit Turnover Average Balance Worst Balance Best Balance
Comparison with last years statistics obtained from the previous CR Comment on significant issues within the current statistics
Earnings for 12 months
Amount in TZS (Last year)

Net Interest Income Guarantee Commission Funds Transfer Other Income Total Income Comparison with previous year Comments on account conduct Comments on earnings increase/decrease Have conditions of previous sanction been met? Covenant compliance (covenant compliance schedule) Any other conditions need to be checked and verified.
Amount in TZS (current period)
FACILITIES WITH OTHER BANKS/FINANCIAL INSTITUTIONS Summary of the facilities with other banks and financial institutions REQUIREMENTS
Brief of what we are seeking renewal, new facility, reduction etc
73
Appendices
Amount Providing for Purpose Pricing Primary Source of Repayment/ Repayment structure Expiry/Review date.
SECURITY
Any waivers
Any pricing changes should be highlighted and justified in this section.
The proposed security and covered provided for credit exposure Debenture formula Draw attention to any changes. Ensure security is shown in full on schedule of security. Are valuations on property realistic under current conditions?
DEBENTURE Terms of debenture
PROPERTY L.R. number, owner of property, leasehold properties remaining term of lease, valuation of property, by whom and when
SHARES Summary of pledged shares The market valuation
COLLATERAL SUMMARY/BORROWING CERTIFICATE (Format attached) TERMS & CONDITIONS Detail requirements e.g. audited accounts Covenants definition Waivers
MONITORING / CONTROL -Daily referral reports -Annual Audited accounts -Periodic visits -Periodic financials -Borrowing Certificate (Debtors, Stocks, Creditors)
74
Appendices
REMUNERATION Interest rates 1. Is the interest rate correct for the type of lending and the strength of customer? 2. Comment on reasons for any change recommended. Commission 1. If shortfall in recovery of commission costs comment on plans for achieving full cost recovery. 2. Amount of negotiation / commitment fee. Ancillary income Comment on any ancillary income generated from the connection.
BUSINESS DEVELOPMENT OPPORTUNITIES Need to outline the plan for business development to be pursued during the year taking into account the company plans detailed in section on products and financial analysis. This information must form the basis of the account strategy over the next 12 months and progress reported during each annual review CONCLUSION
Strong Points Weak Points

(These should be brief, bullet points on the main strengths and weaknesses of the company)
Credit Policy Compliance Recommendation
Author
75
Appendices
Appendix (v) EXCESS RECORDING LOG

DATE BALANCE LIMIT REASON FOR EXCESS AND SOURCE OF CLEARANCE RMS INITIALS SANCTIONERS INITIALS DIARY DATE FOR CLEARANCE ACTUAL DATE OF CLEARANCE
76
Appendices
Appendix (vi)
EXCESS REQUEST
DATE: CUSTOMER: NATURE OF BUSINESS: CURRENT FACILITIES AND EXPOSURE Facility Approved Limit Current Balance TZS 000s Proposed Limit Excess UBA CRR: ACCOUNT STRATEGY:
SUB TOTAL Connected
TOTALS
SECURITY:
REASONS FOR EXCESS: METHOD OF CLEARANCE: PROPOSED DATE OF CLEARANCE: TOTAL NO. OF DAYS EXCESS: FINANCIAL HIGHLIGHTS (Sales, PBT, TNW, C.R., Gearing) RECOMMENDATION:
_____________________________________________________________________ RECOMMENDED BY: ____________________ ENDORSED BY: _______________ APPROVED BY: _______________
NB: Approvals for excess as laid down in Section III of Credit Policies.
77
Appendices
Appendix (vii)
EXTENSION REQUEST
DATE: CUSTOMER: NATURE OF BUSINESS: CURRENT FACILITIES AND EXPOSURE Facility Approved Limit Current Balance TZS 000s UBA CRR: ACCOUNT STRATEGY:
SUB TOTAL Connected
TOTALS
SECURITY: REASONS FOR EXTENSION: ORIGINAL EXPIRY DATE: PREVIOUS NO. OF DAYS EXTENDED: PROPOSED EXTENSION DATE: TOTAL NO. OF DAYS EXTENSION: FINANCIAL HIGHLIGHTS (Sales, PBT, TNW, C.R., Gearing) RECOMMENDATION:
_____________________________________________________________________ RECOMMENDED BY: ____________________ ENDORSED BY: _______________ APPROVED BY: _______________
NB: Approvals for expiry extension as laid down in Section III of Credit Policies.
78
Appendices
Appendix (viii)
Short Form Credit Memorandum
REQUEST: - Brief outline of facility requirements and what approval is being sought. BRIEF HISTORY: - Brief outline of ownership, management, products, markets, industry and location. FINANCIAL ANALYSIS: - Brief analysis of Audited accounts for latest three years if available. CONDUCT OF ACCOUNT: - Brief outline of account statistics for the last 12 months, other bankers, facilities and collateral, and earnings to UBA last 12 months and coming 12 months. SECURITY: - Brief outline of security (attach documentation checklist) CONCLUSION: - Brief recommendation including any risks that are not mitigated and benefits to the bank in this relation.
79
Appendices
Appendix (ix) LETTERS OF COMFORT (EXAMPLES)
Listed below are examples of letters of comfort. These carry differing legal obligations on behalf of the companies concerned. It is essential that the true intentions are fully understood. All correspondence etc should be retained in order to support the Banks position if legal remedies are sought. It is preferable that letters of comfort are signed pursuant to a board resolution of the donor company. NUMBER 1 Dear Sirs ___________________ Limited We refer to the banking facilities which you or your associated companies may from time to time make available to our above named subsidiary and confirm that we will ensure that all liabilities of that company to you or your associates are met in full. We also confirm that during the lifetime of the facilities ____ (Insert name of subsidiary here) __ will remain a wholly owned subsidiary / subsidiary of this company. NUMBER 2 Dear Sirs ___________________ Limited We refer to the banking facilities which you or your associated companies may from time to time make available to our above named subsidiary and confirm that the same have our full approval and that we will ensure that the company has sufficient funds to discharge these liabilities to you as they fall due. We also confirm that during the lifetime of the facilities ______ (Insert name of subsidiary here) ___ will remain a wholly owned subsidiary / subsidiary of this company
80
Appendices
NUMBER 3 Dear Sirs ___________________ Limited We confirm that all banking facilities which you or your associated companies may forward to our above named subsidiary have our full approval. It is our intention that during the lifetime of such facilities ______ (Insert name of subsidiary here) _____, which has an important part to play in the context of the strategic objectives of our group of companies, will remain a (wholly owned) subsidiary of this company We would add that it is our policy to monitor at frequent intervals the performance of our subsidiaries generally. We confirm that we shall not take or approve any action that could result in ______ (Insert name of subsidiary here) _____ not remaining commercially and financially viable, or failing to honour its commitments to you in full. NUMBER 4 Dear Sirs ___________________ Limited We confirm that all banking facilities which you or your associated companies may forward to our above named subsidiary have our full approval and that we will continue to support that company. We also confirm that during the lifetime of the facilities ______ (Insert name of subsidiary here) ____ will remain a wholly owned subsidiary / subsidiary of this company
81
Appendices
Appendix (x)
APPROVED PROPERTY VALUATION FIRMS: 1. Tan Valuers Ltd 2. Let Consultants Ltd
82
Appendices
Appendix (xi)
(Date) Our Ref: To (Valuation Company) Dear Sirs, LETTER OF INSTRUCTION A/C (NAME OF CUSTOMER) We enclose a copy of Certificate of Title (certificate number) (property address) and request that you carry out a valuation on the following basis:a) An open market valuation to indicate the likely sale value if an orderly sale is undertaken to complete within a maximum of 6 months. b) A forced sale value to assume a distressed sale to complete within 2 months. c) Recent experience has demonstrated that auction realisations are fetching far below previously quoted forced sale values. In the circumstances we would like to know the basis on which the forced sale value has been determined. Usually this would be reference to realisations obtained at auction for similar types of property sold over say the last 18 months/2 years. We are anxious to obtain a more accurate determination of forced sale values and feel that this approach would go some way to providing this. d) Replacement value so as to assess building costs for insurance purposes. Please note that you will be acting as agent for the Bank and not the customer and the valuation is not to be discussed with the customer or proprietor. We also ask you to comment on the following:1) Comment as to whether there are any developments in the area that could impact on the valuation. 2) Comment as to whether there are any environmental issues that would impact on the value. 3) Any other information that you feel will be helpful in assessing whether the property is considered good as Bank security.
83
Appendices
4) Two copies of the valuation are to be addressed to us and forwarded to us with you account for settlement at the agreed scale fees. 5) You should also include in the valuation report, a clear colour photograph of the property. Should you have any previous dealings with the customer/proprietor, they should be stated before the valuation is undertaken so as to avoid conflict of interest. Please comment on the effects of Land Act on this property as security for Bank borrowings. Should there be any points requiring clarification, please advise us accordingly. Yours faithfully,
(Name) (Title)
84
Appendices
Appendix (xii) EARLY WARNING QUESTIONAIRE. EARLY WARNING QUESTIONAIRE CUSTOMER:..

DATE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Has an increase in facilities been requested? Has an excess position been seen in the last three months? Was the excess taken without request? Has the average debit balance (hard core) increased over the last six months? Has there been significant change in the conduct of the account over the last 6 months (change in T/Q by +- 10% per month)?. Have cheques been returned unpaid? Are profit margins being eroded? Is there evidence of weakening balance sheet/deteriorating position of parent company, which may be overseas based? Has the company been attempting to raise capital elsewhere? Has there been a substantial decline in the value of security? Has the security been yet perfected? Have there been requests to release security during the last 3 months? Have review of facilities/reports to controlling office been delayed in the last 6 months due to delays in provision of requested information from customer? Have there been delays in the production of agreed figures/budgets? Where a budget and or/ cash flow are being monitored, is there any material divergence from the forecast figures? Are there regular breaches in the monitoring and control conditions? Has there been any change in key personnel or ownership? Are there adverse weather conditions that are likely to affect profitability/cash flow ? Has there been adverse publicity? Is the industry / market the customer is operating in considered high risk?
85
Appendices
Appendix (xiii) STRATEGY SHEET

STRATEGY SHEET DATE
NAME: ACTIVITY : CONNECTION SINCE : BRIEF SYNOPSIS OF PRESENT POSITION TOTAL LIABILITIES OVERDRAFT LOAN BALANCES LIMITS
BRANCH
SECURITY PROPERTY OTHER INT. IN SUSPENSE PROVISION TOTAL
VALUE
TOTAL BRIEF HISTORY SECURITY BACKGROUND ACTIONS TO DATE SPECIFIC ACTION PLAN/ DATE OF COMPLETION OBJECTIVE ACTION POINT TARGET DATE RESULTS
ANY OTHER COMMENTS NEXT REPORTING DATE SANCTIONER'S INITIALS
86
Appendices
Appendix (xiv) DOCUMENTATION CHECKLIST-CORPORATE BORROWERS

United Bank of Africa Limited Credit Administration Unit Documentation Check List - Corporate Borrower :,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, UBA CRR : ,,,,,,,,,,,,,,,,,
Documents Required Yes No Document Name 1 Approved Credit Request ( CR ) 2 Score Sheet 3 Acknowledged Facility Letter 4 Memorandum & Articles of Association 5 Certificate of Incorporation 6 Partnership Agreement 7 Certificate of Registration of a Business 8 Corporate Borrowing Resolution (official company letterhead) 9 Copy of General Terms and Conditions (revenue stamped 10 Guarantee and Indemnity by one person (revenue stamped ) 11 Guarantee and Indemnity by company (revenue stamped ) a b c Corporate Resolution to issue guarantee(company letterhead) Memorandum & Articles of Association Certificate of Incorporation No
Held/Dated Remarks/Exceptions (If any)
12 Bank Guarantee/Standby Letter of Credit (SBLC ) a Availment from Corbank Officer 13 Negative Pledge over the Assets 14 Letter of Responsibility/Letter of Awareness 15 Subordination Agreement
16 Pledged Deposits : a b Memorandum of Pledge / Memorandum of Third Party Pledge Deposit Receipt (marked Collateral)
17 Pledge of readily marketable bonds and shares : a CDSC 5/Bonds certificates
87
Appendices
b c d
Memorandum of Pledge / Memorandum of Third Party Pledge CDSC confirmation of lien required Monthly valuation of shares
18 Debentures : a b c Resolution by Directors to issue debenture(company letterhead) Debenture Document Certificate of the Registration of a Mortgage 19 Legal Charges / Legal Mortgages : a b c d e f Title Deed Legal Charge (s) / Legal Mortgage (s) Document (s) Certificate of the Registration of a Mortgage Resolution by Directors to create a charge / mortgage(letterhead) Valuation Report from acceptable valuers Receipted land rent/rates
20 Equitable Mortgage : a b c d Title Deed Memorandum of Deposit of Title Agreement to create a charge Valuation Report from acceptable valuer
21 Mortgage of Vehicles / Cars : a b c d e Original Log Book Transfer Form signed in blank Chattels Mortgage Valuation Report of Vehicle Current Insurance
22 Fire and Burglary Insurance : a b c d Copy of Policy Document ( Insurance Company Acceptable ) Renewal Endorsement Insurance value adequate UBA's Interest noted
23 Financial Information : a b Audited accounts Spread Sheet
88
Appendices
c d e f
Management Accounts ( Frequency ) Borrowing Certificate ( Frequency ) Stocks / Debtors / Creditors Figures Personal Financial Information
23 Search From Company Registry Company File No. Search From Company Secretary
24 Confirmation from company secretary of no change in memorandum and articles of association
25 Credit Checking ( Opinion ) from : I ii iii 26 Annual Returns
27 Land Rent/Rates
Checked By : ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
Reviewed By : ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
89
Appendices
Appendix xv
DOCUMENTATION CHECKLIST-PERSONAL BORROWERS
United Bank of Africa Limited Documentation Checklist- Personal NAME: .. N Document Name o Doc Required? Doc date Yes A 1 2 3 4 Source Documents Approved Credit Request plus score sheet Accepted Offer Letter Copy of GTC Form duly executed Personal Guarantee No
CRR: A5
Remarks/Exceptions (If any)
B 1 2 3
Pledge of Deposit Memorandum of General Pledge Third Party Memorandum of Pledge Deposit Receipt (marked Collateral)
C Pledge of readily marketable Bonds & Shares 1 Shares/Bonds certificates 2 Memorandum of Pledge
D 1 2 3 4 5 6 7
Legal Charges Title Deed/Deed of Conveyance Mortgage /Charge Document Insurance policy document assigned to UBA Mortgage Protection Insurance cover valuation report Search Report Land Rent/Rates
E 1 2 3 4 5
Personal charge over Motor Vehicles Original log-book Chattels Mortgage Valuation report over vehicle(s) Insurance policy document assigned to UBA Copy of ID and PIN Number Certificate
F Staff charge over Motor Vehicles 1 Original log-book 2 Valuation report over vehicle(s) 3 Insurance policy document assigned to UBA 4 Copy of ID and PIN Number Certificate
G 1 2 3
Charge over Chattels Chattels Mortgage Invoice indicating Serial Numbers of items Insurance policy document assigned to UBA
90
Appendices
H Insurance Policy 1 Insurance Policy document assigned to UBA 2 Letter from Insurance company indicating surrender value
Checked by: Credit Administration.
Reviewed by: Senior Manager CAU
91
Appendices
Appendix xvi
WATCHLIST SHEET
NAME DATE PLACED ON WATCH LIST TOTAL EXPOSURE (HIGHER OF LIMITS OR BALANCE) COMMENTS ON SIGNIFICANT CHANGES IN EXPOSURE SINCE LAST RETURN
TOTAL
92

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UNITED BANK OF AFRICA (UBA)

TABLE OF CONTENTS Page

SECTION 1: GENERAL CREDIT POLICIES

SECTION 4: RISK AWARENESS

SECTION 5: REMEDIAL MANAGEMENT 5.1

5.2.4 5.2.5 5.3 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 5.3.6

SECTION 6: CREDIT RISK MODEL

SECTION 7: PORTFOLIO MANAGEMENT AND REPORTING

BACKGROUND TYPES OF SECURITY AND VALUATION

General Credit Policies

General Credit Policies

General Credit Policies

General Credit Policies

General Credit Policies

General Credit Policies

General Credit Policies

Roles and Responsibilities and Approval Authorities

Roles and Responsibilities and Approval Authorities

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Rules Governing Extension of Credit

Jan 1 Jan 2 Jan 3 Jan 4 Jan 4

Cheque from X Cheque from Z Cheque to Z Cheque from X Cheque to X

1,000 5,000 4,000 8,000 1,000 5,000 4,000 8,000

271 and more

QUARTERLY RETURNS TO CREDIT RISK MANAGEMENT

WRITING-OFF OF CLASSIFIED ADVANCES

Portfolio Management and Reporting

Portfolio Management and Reporting

Portfolio Management and Reporting

Portfolio Management and Reporting

Portfolio Management and Reporting

Portfolio Management and Reporting

UBA LENDING BY INDUSTRIAL SECTOR

8.2.8 CASH Advantage Easy to take. Easy to realize.

Disadvantage Exchange risk if in different currency to liability.

Lending Value 90%

Revaluation Period Monthly

95% 85% 75%

70% 60% NIL 50% 50%

Quarterly Quarterly Quarterly Quarterly Quarterly

Section Financial General Management & Ability to service/Repay Grand Total

Characteristics SALES GROWTH infl adj 25%+ 10-25%

Negative 10% to 0% Below Negative 10%

PROFITABILITY - ROCE Above 25% 10% to 25% 0-10%

Appendices Negative 1-10%

CREDITORS AGEING over 90 days Below 10% 10 to 20%

Above 20% + FINANCIALS

Total maximum =40 points.