What Makes a Good Loan?

Selection of Borrowers, Credit Worthiness

Presentation by:

Golam Hafiz Ahmed

Managing Director &CEO
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An overview of Industry
On September, 2012
Total No. of Banks 47 * Branches 8000 plus
Total No. of PCB. 30
* Deposits Tk. 501260 Cr.
Growth 20.68%
* Credit Tk. 402060 Cr. Growth
18.68%
Still 55% of population left out of Banking system
In 1988 it was Total No. of Banks 23 Branches - 5413
Deposits Tk. 17,115 Cr
Credit Tk. 15,237 Cr.
Total Capital of Banks Tk.56,201 Cr. Which is 11.31%
Banks capital grow 173% in 4 years since 2008
But top 10 Borrowers
holds 18% of total Loans.
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Looming Classified Loans

June.2012
September.2012

Tk. 29,000 CR Which is 7.17% of total loans.

Tk. 36,282 CR Which is 8.75% of total loans.

----------------------------------------------------------------7,000 CR increase.

It was only Tk.22,644 CR in Dec.2011

4 SCBs Tk. 15,518 CR

30 PSBs Tk. 13,586 CR
4 SBs. Tk. 6,427 CR
9 FCBs Tk. 1,076 CR

* Almost 77% i.e. 22,542 CR are Bad & Losses.

* Tk. 6,500 CR income kept in interest suspense depriving the banks.
Tk.24,000 CR write off from the books of the banks so far.
SCBs Tk.10,249 CR, PCBs Tk.10,341 CR, SBs Tk.3,238 CR, FCBs
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Tk.314 CR

An Overview of Corporate Lending

Many issues in corporate lending
High end of the portfolio mix
Fiercely competitive
Potential overexposure to segment
Must carefully follow lending criteria as principles
of lending still apply
When taking risks, occasional losses are not only
likely, but expected

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The purpose of corporate lending

Aim is grow loan book in a way that maximizes shareholder wealth
The Loan portfolio:
Should contain a good mix of interest rates, cash flows and maturities
including:
Diversification of asset mix, geographical composition and loan types
Expertise of staff in market segments, policy, competition elements,
environmental issues (e.g. economic, demographic) and accept
delegation
Appropriate loans audit and review
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The Principles of corporate lending

Lending is a risk/reward trade-off; must manage those
risks well
Encourages corporations to include hurt money as first source
of funding
Three Overarching Principles
1. Safety - Ability to repay the loan
2. Suitability Purpose and amount of loan, hurt money and
repayment schedule
3. Profitability - Sufficient return on investment

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The Principles of Corporate Lending

Methods of lending assessment

Two key methods applied:

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5 Cs and
PARSER

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5Cs - Assessment
Character
The character of a corporation very important
How was company set up and by whom?
What is the reputation of the company and its management?
Does management have a good relationship with its bankers and stakeholders?

Capacity
Lender should consider not just the capacity to service the loan but also provide ways out

for lender

Collateral
Borrower must demonstrate commitment to the project and also provide ways out for lender

Conditions
Lender must consider internal and external forces likely to affect the project

Capital
Requires careful analysis of companys financials

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PARSER-Assessment
Personal Element
Assesses the integrity, culture and ethics of the firm and board
Amount Required
Is amount sufficient for the proposed purpose
Repayment
Should not be based solely on cash-flows
Need to consider trend analysis, detailed cash-flow projections and alternative
repayment options considering the turnover of the firm
Security
Assets supporting the loan representing a second or third way out for the lender
Expedience
How does opportunity fit into the funding and target market segments of the lender?
Remuneration
Does the loan fit well with the credit criteria determined by the credit committee?
How profitable is the loan given the interest rate, application fees, commitment fees,
etc?

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The Principles of corporate lending

The Lending Cycle
Covers the birth (loan approval) to death (repayment) of the loan

Contains three key elements

1- Origination
2- Funding
3- managing

These elements may be further refined

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The Principles of Corporate Lending

Identification/exploitation of target markets
Success of origination depends on finding clients

and delivering the right products

Evaluation proposals via credit analysis
Successfully negotiating terms/conditions
Advising loan applicant of success/failure
Preparation and exchange of documents
Disbursement of funds
Loan administration and review
Determining if payments received on time
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The Principles of Corporate Lending

Should loan not perform
Prior planning should provide strategy to quickly

handle adverse credit events

If remedial actions fail, appropriate courses of action
must be determined
Workout Situation
Can alternatives lead to increased recovery such as change repayment
arrangements, exercise of liens over property, etc?

Write-off outstanding amounts

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The Principles of Corporate Lending

Structuring the loan Proposal
It should address the following questions

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Is loan amount sufficient for task?

Is cash available and repayment identifiable?
Is term of debt long (>12 months) or short-term?
If long-term, will cash-flow projections support repayment and does purpose
match term?
If short-term, does asset conversion cycle and working capital allow
repayment?
Does the borrower have seasonal funding requirements of is it hard-core
debt?

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The Principles of Corporate Lending

Small Corporate Entities

Market segment according to turnover, employee numbers, etc.

Many have unaudited financial statements and financials must be treated with
caution

Large Corporate Entities

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Different banking relationship due to direct access to global capital markets

Requires more innovative solutions to enhance corporate financing activities

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The Principles of Corporate Lending

Product Structure and Application
Popular high-end products include

Revolving Credit: Flexible facility with a limit that may be drawn, repaid and
used again
Standby Lines: Funds that may be drawn when required with guaranteed
access

Revolving Underwriting Facilities: Funds available on

demand and reinstated on repayment

Syndicated Facilities: Mixture of product offerings
shared by multiple lending firms
Project Finance: Specific funding for single large-scale
projects
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The Principles of Corporate Lending

Project Finance Characteristics
Project is distinct financial entity
Project often highly geared (75% debt)
Loans linked directly to projects assets and cashflows
Sponsors guarantees expire with project
End-users and suppliers may provide credit
Lenders recourse limited to projects assets
Finance generally longer-term

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Advanced Corporate Banking

Managing the Loan

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Credit Rating Agencies

Credit rating is a formal credit opinion provided by

rating agency for financial markets

Generally for large corporate and sovereign

borrowers
Ratings used in conjunction with other credit criteria

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Skills Required of the Loan Officer

Appropriate skill set includes
Understanding loan portfolio complexity
Subjective and objective in risk assessment
Sound credit administration and record-keeping
Strong focus on loan monitoring and credit judgment
Technologically competent
Clear thinker who is good at early problem recognition and

decisive solution- finding

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The Importance of Financial

Statements
Accounting, as with lending, is something of

an art
Behind the numbers lie key questions
Are financial statements and cashflow
projections reliable?
Are cashflows sufficient to sustain operations
and ultimately repay debt?
Will cashflows allow repayments to occur when
required under loan agreement?
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Managing the Loan Portfolio

What can we wrong?
30% of bad loans were unsound when loan madefacts missed or analysis was faulty
Much greater risk of errors in loan approval process
than fraud
Risks are
External: Changes to regulations/legislation, technological,
globalization, economic, etc
Internal: Poor planning, organization, profit planning/cost control
and resource management
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Advice from the Past

What are some of the key lessons from

experienced credit managers?

Always try to work in a team for credit decisions
Allow sufficient time for reasoned decisions
Verify all facts and figures
Segregate the selling and approval of loans
Be firm with the client and dont be into bad

decisions
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Advice from the past

Never promise what you cannot deliver
Always consider clients quantitative and qualitative

aspects
Volume is not necessarily profit. The client must also
add to profitability
The purpose of the loan should also indicate the
repayment ability
Visiting clients firms adds to your understanding and
allows business creation
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Advice from the Past

Record all relevant facts as soon as possible, and not

from memory, as files may become evidence

Try to confine client dealings to professional matters

only

Timely and careful gathering of information

Be proactive, not lazy and reactive
All loans should provide at least two ways out

cashflows and security

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