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*DMD* What Makes a Good Loan? Selection of Borrowers, Credit
WorthinessPresentation by: Golam Hafiz Ahmed Managing Director
&CEO
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*DMD*An overview of IndustryOn September, 2012Total No. of Banks
47 * Branches 8000 plusTotal 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 systemIn 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 2008But top 10 Borrowers holds
18% of total Loans.If top 3 borrowers of a bank default the sector
would fall into crisis.
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*DMD*June.2012Tk. 29,000 CR Which is 7.17% of total
loans.September.2012Tk. 36,282 CR Which is 8.75% of total loans.
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7,000 CR increase.Looming Classified Loans4 SCBs Tk. 15,518 CR30
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 Tk.314 CRIt was only Tk.22,644
CR in Dec.2011
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*DMD*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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*DMD*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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*DMD*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 Principles1. Safety - Ability to repay the
loan2. Suitability Purpose and amount of loan, hurt money and
repayment schedule3. Profitability - Sufficient return on
investment
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*DMD* Methods of lending assessmentTwo key methods applied: 5 Cs
and PARSERThe Principles of Corporate Lending
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*DMD*CharacterThe character of a corporation very importantHow
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?CapacityLender should consider
not just the capacity to service the loan but also provide ways out
for lenderCollateral Borrower must demonstrate commitment to the
project and also provide ways out for lenderConditionsLender must
consider internal and external forces likely to affect the
projectCapital Requires careful analysis of companys financials
5Cs - Assessment
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*DMD*PARSER-Assessment
Personal ElementAssesses the integrity, culture and ethics of
the firm and board Amount RequiredIs amount sufficient for the
proposed purpose RepaymentShould not be based solely on
cash-flowsNeed to consider trend analysis, detailed cash-flow
projections and alternative repayment options considering the
turnover of the firm SecurityAssets supporting the loan
representing a second or third way out for the lender ExpedienceHow
does opportunity fit into the funding and target market segments of
the lender? RemunerationDoes 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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*DMD* The Lending CycleCovers the birth (loan approval) to death
(repayment) of the loan Contains three key elements1- Origination2-
Funding3- managing These elements may be further refined
The Principles of corporate lending
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*DMD*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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*DMD*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 amountsThe Principles of Corporate
Lending
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*DMD*The Principles of Corporate LendingStructuring the loan
ProposalIt should address the following questionsIs 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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*DMD*The Principles of Corporate Lending Small Corporate
EntitiesMarket segment according to turnover, employee numbers,
etc.Many have unaudited financial statements and financials must be
treated with caution Large Corporate EntitiesDifferent banking
relationship due to direct access to global capital marketsRequires
more innovative solutions to enhance corporate financing
activities
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*DMD*The Principles of Corporate LendingProduct Structure and
Application Popular high-end products includeRevolving Credit:
Flexible facility with a limit that may be drawn, repaid and used
againStandby Lines: Funds that may be drawn when required with
guaranteed accessRevolving Underwriting Facilities: Funds available
on demand and reinstated on repaymentSyndicated Facilities: Mixture
of product offerings shared by multiple lending firmsProject
Finance: Specific funding for single large-scale projects
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*DMD*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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*DMD*Advanced Corporate Banking
Managing the Loan
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*DMD*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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*DMD*Skills Required of the Loan Officer
Appropriate skill set includesUnderstanding loan portfolio
complexitySubjective and objective in risk assessmentSound credit
administration and record-keepingStrong focus on loan monitoring
and credit judgmentTechnologically competent Clear thinker who is
good at early problem recognition and decisive solution-
finding
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*DMD*The Importance of Financial Statements
Accounting, as with lending, is something of an artBehind the
numbers lie key questionsAre 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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*DMD*Managing the Loan Portfolio
What can we wrong?30% of bad loans were unsound when loan made-
facts missed or analysis was faultyMuch greater risk of errors in
loan approval process than fraudRisks areExternal: Changes to
regulations/legislation, technological, globalization, economic,
etcInternal: Poor planning, organization, profit planning/cost
control and resource management
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*DMD*Advice from the PastWhat are some of the key lessons from
experienced credit managers?Always try to work in a team for credit
decisionsAllow sufficient time for reasoned decisionsVerify all
facts and figuresSegregate the selling and approval of loansBe firm
with the client and dont be into bad decisions
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*DMD*Advice from the pastNever promise what you cannot
deliverAlways consider clients quantitative and qualitative
aspectsVolume is not necessarily profit. The client must also add
to profitability The purpose of the loan should also indicate the
repayment abilityVisiting clients firms adds to your understanding
and allows business creation
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*DMD*Advice from the PastRecord 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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