For
credit officers Credit is one of the core banking functions which require
specialized skills in finance area for building quality assets portfolio in a
Bank.
Similarly,
it is also equally important for credit seekers to know about the areas where
bankers concentrate before granting loans.
Following
are the main topics which cover the lending procedure of any credit officer. I
will cover one by one on various dates. This will facilitate both bankers as
well as those who are credit seekers.
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PRINCIPLES
OF LENDING
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TYPES
OF BORROWERS
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PRE
SANCTION APPRAISAL
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ANALYSIS
AND INTERPRETATION OF FINANCIAL STATEMENTS
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RATIO
ANALYSIS & INTERPRETATION
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BREAKEVEN
POINT ANALYSIS
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DOCTORING
OF BALANCE SHEET - CREATIVE ACCOUNTING
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TYPES
OF CREDIT FACILITIES
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WORKING
CAPITAL FINANCE
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NON
FUND BASED LIMITS
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Let us start today
from the topic ‘principles of lending”
Principles of lending
The
business of lending, which is main business of the banks, carry certain
inherent risks and bank cannot take more than calculated risk whenever it wants
to lend. Hence lending activity has to necessarily adhere to certain principles.
Lending principles can be conveniently divided into two areas
i)
activity
and
ii)
individual.
i) Activity :
1) Principle of safety of funds
2) Principle of profitability
3) Principle of liquidity
4) Principle of purpose
5) Principle of risk spread
6)
Principle of security.
Principle
of Safety of Funds :-
It is a major concern of a Banker.
It essentially means ability of a
banker to critically assess the borrower‘s capacity to repay the amount lent to
him.
This factor now assumes great importance due to stringent NPA norms.
Principle
of Profitability
Profitability is the key word for
every business organization and Bank is not the exception to it.
The profit is the result of sound business decision and is related to cost of
funds and other related risks.
Principle
of Liquidity
It deals with Bankers ability to get
advance liquidated expeditiously.
The deposits are payable on demand or
at short notice and hence banker should not lock up funds in long-term loans.
This aspect has now assumed great importance due to introduction of ALM.
Principle
of Purpose
Lending should be for an approved
purpose.
All Banks lend for productive purpose
as well as for consumption purpose.
Bank should formulate its lending policy in respect of purpose.
Principle of Risk Spread
You should not keep all eggs in one
basket.
Bank should strike a balance between
short term, medium term & long term loans.
Bank should not concentrate advances
to one industry or one field.
Care should also be taken for giving loan to one employer.
Principle
of Security
Security gives a leverage to the
lender in case borrower is not in a position to repay the loans.
The collateral security should be utilized only under extreme circumstances
where the borrower cannot repay.
ii)
INDIVIDUAL :-
Process
of Lending 5 ‗C‘s of the borrower = Character, Capacity, Capital, Collateral,
Conditions
Character implies honesty, integrity,
and reputation in the market, business morality and dependability.
Capacity means knowledge of the
borrower about his business and ability to conduct the affairs successfully.
Capital is the funds to be employed
by the borrower in the business.
In case of partnership/ proprietary
concerns the banker should also anticipate the problem of succession, sharing
of work amongst themselves.
In case of a limited company, a study of the directors/ key men, managing the
unit is essential.
Character
:-
(1)
Character is the greatest and the most important asset, which any individual
can have. Even if a borrower has the capacity and capital to repay a loan, it
is the character of the borrower which indicates his intention to repay. If the
character or integrity of a borrower is known to be questionable, every banker
would avoid him even if backed by sufficient collaterals.
(2)
Character of a borrower is constituted by honesty, sobriety, good habits,
personality, the ability and willingness to keep his word under all
circumstances, reputation of the people with whom he deals etc.
Capacity
:-
It
deals with the ability of the borrower to manage an enterprise or venture
successfully with the resources available to him.
His
educational, technical and professional qualifications, his antecedents,
present activity, experience in the line of Business, experiences of the family, special
skill or knowledge possessed by him, his past record etc. would give a
hindsight into his capacity to manage the show successfully and repay the loan.
Capital:-
It
is his ability to meet the loss, if any, sustained in the business or venture
from his own investment or capital without shifting it to his creditor or
banker. Unless a borrower has some stake in the business, he may not take much
interest in its success.
Collateral:-
Collateral
may be required in certain cases depending upon the risk involved in the
proposal or to secure unsecured portion. Conditions: Loans / Credit facilities
may be granted / sanctioned / disbursed
based on certain terms and conditions.
Hence,
borrower is committed to fulfill all terms and conditions in totality. Sources
of information available to assess the borrower
Loan application
Market reports
Operation in the account
Report from other Bankers
Financial statements, IT returns etc.
Personal interview
Unit inspection prior to sanction
Security
Appraisal
Primary & collateral security should be ‗MASTDAY‘
M
– Marketability A – Easy to ascertain its title, value, quantity and quality. S
- Stability of value. T - Transferability of title. D – Durability – not
perishable. A – Absence of contingent liability. I.e. the bank may not have to
spend more money on the security to make it marketable or even to maintain it.
Y – Yield. The security should provide some on-going income to the borrower/
bank to cover interest & or partial repayment. External factors affecting
borrowers
business : Remedial Strategies
Scrutiny of
Loan Proposal
Scrutiny of
Security
Stipulating
Terms & Conditions of Sanction
Proper
Documentation
Disbursement
and ensuring end use of funds
Close
monitoring of operations and account
Periodic
inspection
Immediate
follow up in case of adverse symptoms
Nursing of the
account
Rescheduling,
Re phasement and Restructuring of account
Avoid ever
greening of loan account
Safeguarding of
security
Timely legal action for recovery
Cash
Credit Monitoring
C
– Credit Summations A – Adequacy of credit summations S – Stock Statement H –
HO approval/ rectification C – Cash/ Cheque operation R – Return of cheques E –
Expiry of limit D – Drawing power I - Insurance T – Tension of recovery.
Any
Credit Proposal must answer the following key questions
Who is to be financed?
What is to be financed?
Why is to be financed?
How much to be financed?
What should the mode be of financed?
What will be the terms and conditions
of finance?
What is likely happen after financing?
Changes in
Government policy.
Foreign
exchange rate variation.
Competition : Local/ Imported products.
Remedial Strategies
Scrutiny of
Loan Proposal
Scrutiny of
Security
Stipulating
Terms & Conditions of Sanction
Proper
Documentation
Disbursement
and ensuring end use of funds
Close
monitoring of operations and account
Periodic
inspection
Immediate
follow up in case of adverse symptoms
Nursing of the
account
Rescheduling,
Re phasement and Restructuring of account
Avoid ever
greening of loan account
Safeguarding of
security
Timely legal action for recovery
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