OBJECTIVE OF THE CASE

This note is designed to enable you to:- :

1. a. facility b. c. d. e. 2. Floating rate and Fixed rate of interest loans as per rate of interest Demand Loan and Loan with fixed maturity period, Revolving loans Secured and Unsecured Loan Understand the role of the Loan officer in making credit decisions. Know various types of Loan products arranged / offered by the Short term and Long term loans- depend upon term or duration of the

commercial banks.

How he balances his two roles? (i) Marketing role, i.e. selling the loan product for achieving budget goals/ targets (ii) Credit officer role- making lending decisions as per the credit policy 3. Understand the various steps involved n making a lending

decision. a. Evaluating Creditworthiness of the borrower which includes: Financial Analysis Qualitative analysis Due Diligence Risk Assessment Determining banks willingness and ability to lend Amount and Terms of the credit facility Conditions Precedent ( requirements the borrower must satisfy before disbursement) Representations and Warranties ( the information and assumptions relied upon as per the confirmation given by the borrower) Covenant of the borrower (borrowers ongoing obligation -violation of which creates an event of default).

b. Structuring the Credit Facility and Loan Agreement which include:

Affirmative covenants Negative covenants Event of Default

4. Selling of Loans to Third Parties (depending upon banks capital

position)
There are pressures and compulsions on banks to maintain loan portfolio conforming to capital position (Regulatory/BASEL requirement). The various methods available to the bank for sale of loans are: Participation Syndication Asset Sale

5. -

Specialized Loans and Credit Products Trade Finance products Letter of Credit (L/C) Bankers Acceptance

ANALYSIS OF THE CASE IN BRIEF

Lending is the primary activity of commercial banks and they are supposed to make proper risk assessment while framing the lending policy, designing the check-list for verification of the creditworthiness of the prospective borrowers, designing the Loan Agreement and above all in identifying and selecting the Loan officer.

1.

What are the various types of Traditional Bank Lending

products?
What is commitment charge? Short-term, Long-term and Revolving loans are the main traditional lending products offered by commercial banks. a) Short term Loans: These are Loans with maturity of one year or less sanctioned for working capital requirements ( purchase of inventory), or seasonal credit requirements of the borrowers/firm.

b) Long-Term Loans: Loans with maturity of more than one year generally availed for purchase of fixed assets, acquiring of another company, refinancing of existing long term debts. Common examples are housing loan, auto loan, Education loan c) Revolving Loans : It is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Example : Credit cards. Cash Credit Limits . Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day operations. Thus in this type of arrangement, the borrower is allowed to borrow up to a maximum commitment level and not as a single transaction, Cheque facility is also provided for cash credit accounts. Commitment charges
Non-revolving credit - it can't be used again after payment. Examples are education loan, auto loans, Housing loans that can't be used again once they've been repaid.

Commitment charge : Under cash credit revolving limit, Customer is free to draw when ever he wants. Banks charge interest only on the outstanding amount drawn by the customer. To minimize the loss due to non utilization of the limit by the customers, banks charge commitment charges (generally < 1% per annum ) towards the unutilized limit. 2. What are the Roles of the Loan officer in a commercial bank ? Lending is not free from risks. When banks depend on borrowed funds for lending they cant afford taking undue risks. Lending officer plays a very crucial role in the lending process and managing risks in lending . For bank to succeed, he must be able to accurately identify, measure and manage lending risks. The lending officer is often required to balance two performs two divergent roles like that of a marketing officer and a credit officer While as a marketing officer, he is expected to develop new banking relationships for marketing and selling the different loan products to achieve the set target and goals, as a credit officer, he is expected to ensure the credit quality and minimize loan losses and contribute towards higher yield on loans & advances. 3. What are the various steps involved in making a lending Process? Finding the Prospective Customer, Evaluating the prospective Customers Character, Purpose, Credit record, Financial conditions, Assessing the Security/Collaterals offered and Monitoring after release of the loan are the main steps in a lending process. 4. H o w t h e l o a n o f f i c e r d e c i d e s a g o o d l o a n ? ( o r , What makes a

Good Loan?) What are the six Cs of Lending? The following three basic aspects about the loan proposal ensure a good loan proposal. a. Is the borrower Creditworthy? How to know it? b. Can the Loan Agreement be properly structured and documented so that banks interest is adequately protected? c. Can the lender enforce its claim against the assets/earnings of the customer in case of default? The six Cs of Lending The basis thing that must be dealt with before finalizing the sanction is whether the customer can service the loan. This needs study of the following six aspects of a loan proposal. 1. Character - the loan officer must be convinced that the customer has a defined purpose for availing credit and serious intension to repay the loan. 2. Capacity the loan officer must be convinced that the customer has the authority to request a loan. 3. Cash does the borrower have the ability to generate enough cash? 4. Collateral does the borrower own enough quality assets to provide adequate support for the loan? 5. Conditions recent trends in the borrowers line of work and how the changes in economic conditions might affect the loan? 6. Control - whether change in law and regulations could adversely affect the borrower? 5. What are the various steps involved in evaluating the creditworthiness of a prospective borrower? What are cardinal principles of Lending ? a. Financial Analysis b. Qualitative analysis c. Due Diligence d. Risk Assessment e. Determining banks willingness and ability to lend Cardinal Principles of Lending: . Safety, Liquidity, Profitability, Productive Purpose, Diversification of

Risk and Security constitute the cardinal principles of lending. But with introduction prudential norms, regulatory requirements form a part of lending decision. 6. What is the significance of Financial Appraisal in making a lending decision and how is it done? The financial appraisal enables the banker to assess the credit risk in the proposal. A properly assessed proposal is deemed to be half recovered. There are various techniques and ways of doing an appraisal and these include an interview with the prospective borrower, a site visit, an analysis of financial statements, and a review of transactions with the bank (in case of existing accounts). The loan officer needs to assess quality of the earnings and strength of the balance sheet. He should analyze financial, operating, leverage ratios, trends in revenues and expenses and compare the ratios with industry averages. A thorough Financial analysis involves : a. b. c. d. e. f. g. Year-on-year comparison of financial statements Cash flow statement Liquidity analysis Analysis of Capital Structure Projections analysis Estimation of assets value Comparison of actual vs budgeted performances

7. How to structure the credit facility and Loan agreement ? Amount of the Loan [ project cost, margin stipulated and loan limit] Terms of the Loan ( short, long, revolving, etc.) Requirements the borrower must satisfy before disbursement) Representations and Warranties (information relied upon as per the confirmation given by the borrower) Covenant of the borrower (borrowers ongoing obligation -violation of which creates an event of default). Affirmative covenants Negative covenants Event of default

8. What are the different methods of selling Loans to third parties? BASEL committee on Banking Regulations, Regulatory and supervisory practices of the Central Bank (RBI) have led the banks to fix their own

exposure norms. Loan officer s decision of lending is subjected to banks lending capacity, risk-based capital guidelines and banks internal lending policies (banks appetite for lending / exposure norms). Therefore, banks are very often forced to sell off a portion (may be all) of the loans they originate. Different practices followed are : Participation ( single loan made to a large borrower by more than one bank) Syndication ( similar to participation, but here the participating banks lend out directly to the borrowing firm) MBAs Asset Sale ( Here the lead bank initially takes the full amount of loan to be financed, and then sells off majority or all to other banks).

9. What are specialized Loan and Credit products? a. Trade Finance (Products designed to reduce the risks and uncertainties associated with commercial transactions - Letter of credit and bankers acceptance) b. Letter of Credit (issued by purchasers bank to a seller) c. Bankers Acceptance( Banks commitment to pay a specific amount of money after a specific date)

Non- Traditional bank finances

1. Factoring Finance 2. Venture Capital Finance 3. Bridge Loan 4. Reverse Mortgage 5. CP

SOME BANK LOANS IN INDIAN CONTEXT

Composite Loans: When loan is granted both for

working capital and other capital assets - generally granted to small borrowers, such as artisans, farmers, small industries, etc.

Consumption Loans: Granted in a limited scale for meeting

expenses towards medical needs, marriage, etc.

Bridge Loans: Loans arranged to industrial undertakings

to meet their urgent and essential needs during the period when formalities for availing term loans are being fulfilled.