Basic Credit

Course Code: SB 301

Service Executive Conversion
Programme (SECP)

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Course content
Module 1: Macro Economic & Environmental Analysis; Industry and
Company Risk Rating Analysis

Module 2: Fundamentals of Credit

Module 3: Overview of the Credit Process

Module 4: Types of Lending and Loan Analysis and Structuring

Module 5: Legal Aspects of Banking and Securities for Lending

Module 6: Major Credit Products, their peculiarities and the risks and
mitigants

Module 7: Collections Management & Credit Monitoring

Module 8: Credit Writing and Presentation

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 Mute yourself Encourage
except when you each other
have the floor. with
appropriate
response
emojis.

Raise your hand virtually for Avoid distracting

permission to speak. (One backgrounds or
person talks at a time.) actions.

Keep your video on

for attendance
purposes.

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Business Outcome
At the end of this course participants should be able to
• Apply knowledge gained to evaluate and analyse credit
requests
• Identify and explain the C’s of credit and its application inn
credit decision and loan structuring.
• Identify the different variants of credit products in the Bank
and the target customer segments for each of the products
• Discuss credit documentation requirement, Collateral types
and its implications on credit assessment and loan
structuring.
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MODULE 1
Macro-economic and
Environmental, Industry and
Company Risk Rating Analysis
UNDERSTANDING MACRO-ECONOMICS
A THREE TIER APPROACH

Political
Environment

Economic
Policies

Social
Impact

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 Macro Economic Analysis - Our Operating
Environment
• Macro-economics describes and explains economic processes that concern aggregates. It is the
study of the behaviour of an economy at an aggregate level.
– An aggregate is a multitude of economic subjects that share some common features.

• The following are the objectives of macro-economic policies:

– Full employment
– High living standards
– Price stability
– Reduction of economic inequality
– Rapid economic growth
– Steady foreign exchange position

• A robust analysis of the global economy seeks to measure the change in the above indices in the
different economies of the world.

• An analysis of the global economy also shows how countries can be clustered according to the
level of their development measured by the above indices

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AFRICA’S MAJOR PROBLEMS

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THE ROLE OF GOVERNMENT
• As a social organization; the distinguishing characteristic of Government is its monopoly
over the legitimate use of force to modify the actions of adults

• Government has two basic functions;

– Protective Function

– Productive Function

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KEY FACTORS AFFECTING THE MACROECONOMY

GROWTH EXCHANGE
RATE RATE

INTEREST INFLATION
RATE RATE

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KEY FACTORS AFFECTING THE MACROECONOMY

Economic Growth Rate

▪ Economic growth is defined as the increasing capacity of the

economy to satisfy the wants of the members of its society
▪ Growth rate is a measure of the increased (decreased) capacity of
the economy
▪ Evidenced by consumer spending patterns in any economy which
indicate the health of an economy
▪ Usually recorded as a boom or recession
▪ The year on year measurements tell whether or not a country has
increased its productivity

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KEY FACTORS AFFECTING THE MACROECONOMY
Interest Rates

▪ Rates at which businesses borrow in order to supply their goods

and services

▪ Have a direct impact on production costs and profitability of a

company

▪ High interest rates reduce purchasing power of consumers

▪ Federal Governments routinely lower interest rates in a weak

economy to stimulate demand of goods and services

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KEY FACTORS AFFECTING THE MACROECONOMY

Currency Exchange Rates

▪ The rate of exchange between different countries’ currencies

▪ Movement in exchange rates affect production costs and

demand for goods and services

▪ Stability in exchange rates allows companies to plan and

forecast productivity performances

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KEY FACTORS AFFECTING THE MACROECONOMY

Inflation
can simply be defined as the sustained rise in the prices of goods and
services over time.

Often described in layman’s terms as too much money chasing too few
goods

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ECONOMIC CYCLES

Understanding the economic cycle

• This is the predictable long-term pattern changes in national income.
• The Economy experiences a regular trade or business cycle where the rate of growth of
production, incomes and spending fluctuates over time. These movements are captured and
used to measure the cyclical movement of the economy. As follows:
• When real GDP (or national output) is rising quickly the economy is said to be experiencing
economic growth or recovery. A good example of this was the economic boom in Nigeria in the
early 1970s.
• When real output falls or when the growth of output is below its long run trend rate - then
economic recession exists.
• With changes in economic cycles, businesses also experience changes in activities and overall
business condition ranging from expansion of output to periods of prosperity.
• When economies experience slowdowns and negative growth, business also experience
contraction of output and recession.

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STAGES OF ECONOMIC CYCLE
Economic Boom
• A boom occurs when national output is rising strongly at
a rate faster than the trend rate of growth (or long-term
growth rate) of about 2.5% per year.
• In boom conditions:
❑ Output and employment are both expanding

❑ The level of aggregate demand for goods and services is very

high.

❑ Typically, businesses use the opportunity of a boom to raise

output and also widen their profit margins.

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STAGES OF ECONOMIC CYCLE

Economic Slowdown
• A slowdown occurs when the rate of growth decelerates - but national output
is still rising. If the economy continues to grow (albeit at a slower rate)
without falling into outright recession, this is known as a soft-landing

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ECONOMIC CYCLE
Economic Recession
A recession means a fall in the level of real national output (i.e. a period
when the rate of economic growth is negative).
National output declines, leading to a contraction in employment,
incomes and profits.
When real GDP reaches a low point at the end of the recession, the
economy has reached the trough - economic recovery is imminent.

• An economic slump is a prolonged and deep recession leading to a

significant fall in output and average living standards.

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ECONOMIC CYCLE
Economic Recovery
• A recovery occurs when real national output picks up from the trough
reached at the low point of the recession.

• The pace of recovery depends in part on how quickly aggregate demand

starts to rise after the economic downturn. And, the extent to which
producers raise output and rebuild their stock levels in anticipation of a
rise in demand.

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Matching Borrower Needs - Business Life Cycle

Sales
SALES AND PROFITS (N)

Profit

Start up Growth Maturity Decline

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 Business Life Cycle – Industry
Maturity
Emerging Industries Growing Industries

Newly formed or revitalized by changes in Strong sales growth

technology, consumer needs, production costs or Rapid market expansion
other changes that make a new product or Increasing profit amid increasing capital outlay
service a potentially viable business opportunity.

Risks Risks
➢ Uncertainty about technology ➢ High tendency to overtrade
➢ High initial costs but steep cost reduction ➢ High initial costs but steep cost reduction
➢ No clear wining strategies ➢ Defending market share even as expansion
➢ Newly formed companies : Inexperienced takes place
management, Difficulties in cost control, No ➢ Growing companies : Difficulties in cost
standard pricing and packaging of products, control, Better pricing and packaging of
Product first established may be obsolete quickly. products, Product first established may be
obsolete quickly.

Financing requirement Financing requirement

Sales growth, plant expansion, R&D Plant and other fixed asset expansion, R&D,
huge working capital requirement

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 Business Life Cycle – Industry
Maturity
Matured Companies Declining industries
Grow modestly rather than at the explosive rate Have experienced a consistent decline in
found in growing industries. Products and unit sales over a long period of time.
services are more standardized and new products
developed less frequently. Management focuses Survival is the highest priority for companies
on reducing production and operating costs and in declining industries
product prices.

Risks
Risks ➢ Unsure about successful survival
➢ Increased competition for market share
strategies
➢ Customer become more discerning and
➢ Margins are thin and additional burden of
knowledgeable servicing may drown company
➢ Focus of competition shifts, promotion on
➢ Uncertainty about remaining life of
price and added service industry.
➢ Product standards emerge

Financing requirement Key is to be able to determine which

Plant replacement/upgrade, seasonal operating companies within the industry are likely to
cycle financing, long-term financing of core survive and examine their survival
current assets strategies.

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Economic Variables to Watch & Impact
on Lending Business
• Key variables
– Gross domestic product: Gross domestic product (GDP) is a
monetary measure of the market value of all final goods and services produced
in a period (quarterly or yearly) within the borders of a country. Which is better
for Banking? GDP or GNP

– Unemployment rates: The unemployment rate is the share of the labor force that
is jobless, expressed as a percentage

– Interest rates: An interest rate, is the amount of interest due per period, as a
proportion of the amount lent, deposited or borrowed (called the principal sum).
In most economies, the government has a base lending rate at which it lends to
banks. In Nigeria, it is called the Monetary Policy Rate (MPR)

– Inflation: Inflation is a sustained increase in the general price level of goods and
services in an economy over a period of time resulting in a loss of value of
currency.

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Fiscal Policy and Government Budget
The Budget of a government is the control document that presents the revenue and
expenditure of a company for a period of one year. The budget of any country
contains the following:
• Proposed sourcing of revenue, including assumptions; Taxes, Exports, Loans,
etcetera
• Proposed uses of expenditure, including assumptions; sectoral spend, debt
servicing, recurrent expenditure, etcetera.

In managing its fiscal policy, a government can have three types of budgets:
• The Deficit Budget: A budget is deficit when government expenditure exceeds
government revenue. This is usually deployed when the government wants to
stimulate aggregate demand in the economy
• The Surplus Budget: A budget is surplus when government revenue exceeds
government expenditure.

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Fiscal Policy and Government Budget…

• The Balanced Budget: A balanced budget refers to a budget in which

government revenue is equal to its expenditure. Thus, neither a budget deficit nor
a budget surplus exists (the accounts "balance").
• Because of the multiplier effect, it is possible to change aggregate demand (Y)
keeping a balanced budget. The government increases its expenditures (G),
balancing it by an increase in taxes (T).
• Since only part of the money taken away from households would have actually
been used in the economy, the change in consumption expenditure will be smaller
than the change in taxes.
• Therefore, the money which would have been saved by households is instead
injected into the economy, itself becoming part of the multiplier process.
• In general, a change in the balanced budget will change aggregate demand by
an amount equal to the change in spending
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Monetary Policy
How the Central Bank of Nigeria regulates the supply of money in the
Economy
•The cash reserve requirement (CRR) impacts the of Banks to create credit. A
higher CRR reduces the capacity of banks to create loans.

•Money supply drives inflation and interest rates. Reduced money supply
reduces inflation and interest rates.

•The monetary policy rate (MPR) is the minimum "discount rate" which the
Central Bank of Nigeria charges on funds it loans to banks overnight

•The monetary policy rate is set by the monetary policy committee.

•An increase in monetary policy rate means an increase in the interest rate at
which bank’s lend to their customers.

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 Monetary Policy…

• Monetary Policy - manipulation of the money supply to influence economic activity, also a
“demand-side” activity
– Easy to formulate, but takes a longer time to work through the economy
• Tools of monetary policy
– Open-market operations
• Adds/removes liquidity to the system. It entails the sale or purchase of treasury
bills. The sale of treasury bills by CBN implies reducing liquidity while the
purchase of treasury bills from the Public by CBN implies increase in liquidity.
– Discount rate
• The rate banks can borrow short-term from CBN and indirectly the rate
consumers pay for borrowing. An increase in discount rate reduces liquidity while
a decrease in discount rate increases liquidity.
– Reserve requirements
• The amount that banks must keep in liquid asset or cash as reserve at CBN. The
increase in reserve requirement will reduce liquidity while a reduction will
increase liquidity.

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Doing Business in Nigeria - Challenges

• Electric Power Supply: One of the major challenges holding back

the Nigeria economy is unstable power supply.
– Companies spend exorbitant amounts generating their own electricity via
petrol or diesel generator. This increases operating expense.

• Security: The series of bombings and killings by “Boko Haram”

has rendered it almost impossible to do business in certain parts
of Northern Nigeria.
– This continually serves as a deterrent to potential investors.
– Series of kidnapping in several parts of the country are also beginning to
be a worrying trend.

• Weak Legal Framework to support Business: Due to the difficulty

in enforcing contracts, many foreigners are discouraged from
investing in Nigeria.

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Doing Business in Nigeria - Challenges

• Policy Instability: Successive government policies have not be

well thought-through leading to frequent oscillation. This is
not good for the business environment.
– Banning and un-banning of importation of certain items.

• Natural Disasters: The latest addition to our challenges are

the floods in the Kogi Area. It has resulted in the closure of
many businesses and the loss of lives and property.
• Finding Skilled Labour: Due to the massive decline in the
quality of the education system, university graduates are
not able to be productive members of the labour force
without heavy investment in training from their employers.
– This increases the operating expense of companies.
– JAPA Phase

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Doing Business in Nigeria - Opportunities
• Huge and Diverse Population: Nigeria’s huge population presents a
ready market for almost any and every type of commodity.
– This creates vast opportunities in the retail sector.

• Increasing number of emerging sectors: Over the years, a number of

sectors have been revived via regulator-led reforms, i.e. Telecoms,
Banking, etc. There are yet a number of sector current being opened up
for business with huge inherent opportunities:
– Power Sector: The government have licensed privately held Distribution
Companies (DISCOs) and Generating Companies (GENCOs).
– Mobile money sub-sector: The regulator induced ‘Cashless’ society has brought
in its wake the establishment of mobile money companies. The Payment-
systems sub-sector of the financial services industry is thus pregnant with
opportunities.
– Agriculture Sector: Federal and state government policy increasingly favours
investment in agriculture.

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Comparative
Analysis
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COMPARATIVE ANALYSIS
• When companies decide to conduct a marketing campaign or expand their
business, a comparative analysis can provide information that influences
important decisions.
• In order to make decisions that benefit both a business and its customers,
this analysis gathers various data sets to make comparisons between
several choices.
• If you or your business wants to ensure that you have an effective
decision-making process, it may be beneficial to learn about comparative
analyses.
• Comparative analysis includes: SWOT, Potters five forces, PESTEL
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SWOT ANALYSIS
• SWOT (strengths, weaknesses, opportunities, and threats) analysis is a
framework used to evaluate a company's competitive position and to
develop strategic planning. SWOT analysis assesses internal and external
factors, as well as current and future potential.

• A SWOT analysis is designed to facilitate a realistic, fact-based, data-

driven look at the strengths and weaknesses of an organization, initiatives,
or within its industry. The organization needs to keep the analysis accurate
by avoiding pre-conceived beliefs or gray areas and instead focusing on
real-life contexts. Companies should use it as a guide and not necessarily
as a prescription.
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SWOT ANALYSIS
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Industry Analysis Steps – Industry Competitiveness

A The intensity of competition in an industry is neither a matter of coincidence nor bad luck.

B Competition in an industry is rooted in its underlying economic structure and goes well beyond
the behavior of current competitors.

C The state of competition in an industry depends on five basic competitive forces.”

A good analysis tool Michael Porter’s Five Forces Model

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Industry Analysis – Industry Attractiveness

3 4
2 Bargaining 5
Power of Substitutes
Buyers Industry
Barriers to
Entry Rivalry
1
Bargaining
Power of
Suppliers The attractiveness of an industry is dependent on:
➢ How are the five forces configured?
➢ What are the key drivers of change?
➢ What are the Key Success factors?
➢ What are the possible scenarios of industry evolution?
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Elements of the Environment - PESTEL

PESTEL Analysis
PESTEL Analysis is a strategic framework used to evaluate the external
environment of a business by breaking down the opportunities and risks into
Political, Economic, Social, Technological, Environmental, and Legal factors.
PESTEL Analysis can be an effective framework to use in Corporate Strategy
Planning and for identifying the pros and cons of a Business Strategy. The PESTEL
framework is an extension of the PEST strategic framework, one that includes
additional assessment of the Environmental and Legal factors that can impact a
business.
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Elements of the Environment - PESTEL

PESTEL Analysis
Below we break down the key items of each of the 6 Factors of the PESTEL
framework (Political, Economic, Social, Technological, Environmental, and Legal).
Points derived from PESTEL Analysis can be incorporated into other strategic
frameworks, such as SWOT Analysis and Porter’s 5 Forces, where relevant.
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Elements of the Environment - PESTEL

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Elements of the Environment - PESTEL

Political Factors
When looking at political factors, you are looking at how government policy and
actions intervene in the economy and other factors that can affect a business.
These include the following:
▪ Tax Policy
▪ Trade Restrictions
▪ Tariffs
▪ Bureaucracy
One of the reasons that elections tend to be a period of uncertainty for a country is
that different political parties have diverging views and strategies for policy on the
items above.
Elements of the Environment - PESTEL
Economic Factors
Economic Factors take into account the various aspects of the economy, and how
the outlook on each area could impact your business. These economic indicators
are usually measured and reported by Central Banks and other Government
Agencies. They include the following:
▪ Economic Growth Rates
▪ Interest Rates
▪ Exchange Rates
▪ Inflation
▪ Unemployment Rates
Often these are the focus of external environment analysis. The economic outlook
is of extreme importance for a business, but the importance of the other PESTEL
factors should not be overlooked.

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Elements of the Environment - PESTEL
Social Factors
PESTEL analysis also takes into consideration social factors, which are related to
the cultural and demographic trends of society. Social norms and pressures are
key to determining consumer behavior. Factors to be considered are the following:
▪ Cultural Aspects & Perceptions
▪ Health Consciousness
▪ Populations Growth Rates
▪ Age Distribution
▪ Career Attitudes

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Elements of the Environment - PESTEL
Technological Factors
Technological factors are linked to innovation in the industry, as well as innovation
in the overall economy. Not being up to date to the latest trends of a particular
industry can be extremely harmful to operations. Technological factors include the
following:
▪ R&D Activity
▪ Automation
▪ Technological Incentives
▪ The Rate of change in technology

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Elements of the Environment - PESTEL
Environmental Factors
Environmental factors concern the ecological impacts on business. As weather
extremes become more common, businesses need to plan how to adapt to these
changes. Key environmental factors include the following:
▪ Weather Conditions
▪ Temperature
▪ Climate Change
▪ Pollution
▪ Natural disasters (tsunami, tornadoes, etc.)
Additionally, there is increasing importance for businesses to be environmentally
friendly with their operations, as evidenced by the rise of Corporate Sustainability
Responsibility (CSR) initiatives. Examples of CSR initiatives include carbon footprint
reduction efforts and transitions into renewable material and energy sources.

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Elements of the Environment - PESTEL

Legal Factors
There is often uncertainty regarding the difference between political and legal
factors in the context of a PESTEL analysis. Legal factors pertain to any legal forces
that define what a business can or cannot do. Political factors involve the
relationship between business and the government. Political and legal factors can
intersect when governmental bodies introduce legislature and policies that affect
how businesses operate.
Legal factors include the following:
▪ Industry Regulation
▪ Licenses & Permits
▪ Labor Laws
▪ Intellectual Property
Roles of Credit Bureaus

• To maintain a database of borrowers from lending

institutions
• To provide a central storage for all the information
collected
• To provide credit information upon request
• To eliminate/reduce information discrepancy in the
lending industry
• To allow increased access to credit

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 Conclusion: Global Economic and
Political Analysis
Key Considerations
• Performance in countries and regions is highly variable
– Monitor it well

• Political risk can change everything

– Keep your hand on the country’s political pulse

• Exchange rate risk is always there

– Keep abreast and cover yourself if economically feasible, i.e.
sales, profits, stock returns

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Global Economic and Political Analysis…

Key Considerations?
• Government Policy
– Fiscal and Monetary Policy

• Factors that impact the economy

– Supply and demand shocks

• Business cycles
– Troughs and peaks

• Forecasting
– Tools to help

• Key variables to watch: Unemployment rate; Interest Rate; Exchange

Rate; Inflation; Devaluation etc

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 Class Exercise:
Considering the macroeconomic issues raised so far, discuss the implications for these sectors of our
economy and your approach to them as a retail lender:

What Implications? What Implications?

Contractors Education
Construction Health
Oil & Gas MDAs/ Employees
Importation Churches
Non-bank FIs Hospitality
Agriculture Exporters
Power Cooperatives
Private Sector Employees

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 MODULE 2:
FUNDAMENTALS OF
CREDIT

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WHAT IS RISK?
▪ Risk is the potential of gaining or losing something
of value. Values such as physical health, social
status, emotional well being or financial wealth,
can be gained or lost when taking risk resulting
from a given action or inaction, foreseen or
unforeseen.

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WHAT IS RISK?
▪ Risk can also be defined as the probability or like-
hood, chance that an event will occur that cause a
negative impact on the capital and earnings of the
organization.
▪ Risk is part of all our lives. As a society we have to
take risks to grow and develop.

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RISK APPETITE
This is the level of risk exposure or potential adverse
impact from an event that an organization is willing
to accept or retain. Therefore, once the risk appetite
threshold has been reached, risk management
treatments and controls already put in place are
activated to bring the exposure level back within
acceptable range.

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RISK TOLERANCE
▪ This is regarded as the maximum level of loss that
an organization is comfortable absolving at a given
time.
▪ Risk tolerance usually apply to Operational Risk,
while Risk Appetite apply to Credit Risk and Market
Risk.

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RISKS IN BANKING
The main risks that banks have identified in its
operations are:

1 Credit Risk 4 Operational Risk

2 Market/Systematic Risk 5 Compliance Risk

3 Liquidity Risk 6 Interest Rate Risk

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CREDIT TERMINOLOGIES
Below are some Credit Terminologies used in Banking:

▪ Credit Turnover- This represents the total amount of

payments received in a customer’s account within a
specified period.
▪ Debit Turnover- This represents the total amount of
withdrawals or payments made out of a customer’s
account within a specified period.
▪ Earnings/Account Profitability: This is the total amount
of income/charges made on a customer’s account
within a period of time.

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CREDIT TERMINOLOGIES
▪ Letter of Offer: This is the contractual document
issued by the bank to a customer containing all
important terms and conditions for approving a
credit facility.
▪ The is usually signed by authorized officers of the
bank and the customer is expected to sign a copy
and return to the bank indicating the acceptance of
the facility in line with the terms and conditions.

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CREDIT TERMINOLOGIES
▪ Collateral/Security: This is the valuable asset that a
customer gives to the bank to back a loan request.
▪ Credit Risks: These are the risks peculiar to a loan facility
vis-à-vis the customer and the industry in which it
operates.
▪ Risk Mitigants: These are recommended ways of
cushioning or avert the various credit risks highlighted in
facility.
▪ Covenants: These are legally binding restrictions during
the life of a loan facility agreed upon by the borrower and
the bank.

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CREDIT TERMINOLOGIES
▪ Conditions Precedent: These are certain things that
a customer must meet/do before the approved
loan facility can be disbursed.
▪ Primary Source of Repayment: This is the main
customer’s cash flow that is expected to repay a
facility.
▪ Secondary Source of Repayment: This is the
alternative source of repaying a facility should the
primary source fail.

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THE Cs OF CREDIT

▪ Character
▪ Capacity
▪ Capital
▪ Collateral
▪ Condition

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CHARACTER
▪ This is the part where the general impression of the protective
borrower is analysed.

▪ The lender forms a very subjective opinion about the trust –

worthiness of the entity to repay the loan.

▪ Discrete enquires, background, experience level, market

opinion, and various other sources can be a way to collect
qualitative information and then an opinion can be formed,
whereby he can take a decision about the character of the
entity.

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CAPACITY
▪ Capacity refers to the ability of the borrower to service the
loan from the profits generated by his investments.
▪ This is perhaps one of the most important of the five
factors.
▪ The lender will calculate exactly how the repayment is
supposed to take place, cash flow from the business, timing
of repayment, probability of successful repayment of the
loan, payment history and such factors, are considered to
arrive at the probable capacity of the entity to repay the
loan.

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CAPITAL
▪ Capital is the borrower’s own skin in the business.
▪ This is seen as a proof of the borrower’s commitment to the
business.
▪ This is an indicator of how much the borrower is at risk if the
business fails.
▪ Lenders expect a decent contribution from the borrower’s own
assets and personal financial guarantee to establish that they
have committed their own funds before asking for any funding.
▪ Good capital goes on to strengthen the trust between the
lender and borrower.

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COLLATERAL
▪ Collateral are form of security that the borrower provides to the
lender, to appropriate the loan in case it is not repaid from the
returns as established at the time of availing the facility.
▪ Guarantees on the other hand are documents promising the
repayment of the loan from someone else (generally family
member or friends), if the borrower fails to repay the loan.
▪ Getting adequate collateral or guarantees as may deem fit to
cover partly or wholly the loan amount bears huge significance.
▪ This is a way to mitigate the default risk. Many times, Collateral
security is also used to offset any distasteful factors that may
have come to the fore-front during the assessment process.

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CONDITIONS
▪ Conditions describe the purpose of the loan as well as the
terms under which the facility is sanctioned.
▪ Purposes can be Working capital, purchase of additional
equipment, inventory, or for long term investment.
▪ The lender considers various factors, such
as macroeconomic conditions, currency positions, and
industry health before putting forth the conditions for the
facility.

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CREDIT RISK MANAGEMENT TOOLS

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CREDIT RISK MANAGEMENT TOOLS
▪ Credit Risk Management involves understanding,
analyzing and addressing risks to make sure banks achieve
their original objectives.
▪ For any bank the importance of Credit Risk Management
is paramount. It is the basis for which a lender can
calculate the likelihood of a customer defaulting on a loan
or meet other contractual obligations.

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CREDIT RISK MANAGEMENT TOOLS
▪ More broadly, Credit Risk Management attempts to
measure the probability that the lender will not receive
the owed principal and accrued interest, which if
allowed to happen will lead to a loss and increase costs
for collecting the debt owed.
▪ In simple terms, credit risks are calculated based on a
borrowers ability to repay the amount lent to them and
arriving at expected loss and unexpected loss

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CREDIT RISK MANAGEMENT TOOLS
Credit Risk Analysis Department usually use two types of
methods-
▪ Qualitative
▪ Quantitative

The Qualitative tool involves mainly the 5Cs of Credit namely

• Character
• Capacity
• Capital
• Collateral
• Conditions

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CREDIT RISK MANAGEMENT TOOLS
Quantitative tools involves using
▪ Credit Rating Agents or developing an internal rating
model.
▪ Financial Analysis of Company’s performance over a three
year period with the help of ratio analysis.
▪ Account Profitability of the customer in the books of the
bank.

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Class Exercise
What are the causes of Credit Risk?

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LOAN TYPES
Short Term
Credits.
(Overdraft ,
Special
TransactionT
ied advance.

Loan Medium to
Special
Credits.
Types Long Term
Credits

Contingent
Credits

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LOAN TYPES
▪ Before analysing a Credit request from a borrower, the
banker would first need to have a clear understanding
of the various needs for funds and therefore their
alternative uses by customers.

▪ This is essential as the financing package subsequently

offered to the customer would need to be specifically
structured to suit the peculiar purpose to which it is
being put.

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LOAN TYPES
Bank’s Credits to cover these various customers
needs can be classified into four major categories:
▪ Short Term Credits
▪ Medium to Long Term Credits
▪ Contingent Credits
▪ Special Credits

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LOAN TYPES-SHORT TERM CREDITS
Short Term Credits have a maturity of less than one year
and basically fall into two categories:
▪ Overdraft or Working Capital lines of credit
▪ Special Transaction-tied advances

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LOAN TYPES-OVERDRAFT
▪ These are short term facilities usually structured to
cover seasonal swings in the working capital of a
borrower.
▪ Usually the bank would analyse the company’s
operations to identify projected cash flow trends
and then establish the peak funding requirements
over a defined period of 6-12 months.
▪ Overdraft are availed to meet customer’s working
capital needs and not for fixed expenditures.

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LOAN TYPES-OVERDRAFT
▪ An Overdraft occurs when withdrawals from a bank
account exceed the available balance which gives the
account negative balance.
▪ The facility offers flexibility to the borrower as draw
downs on the line are only made as the need arises.
▪ Interest is therefore only charged on the drawn portion
of the line.
▪ Pay downs are also made on the line as the company’s
cash flow improves.
▪ It is repayable on demand by the bank at anytime.

78
Special Transaction-tied Advances
Rather than covering seasonal cash flow fluctuations,
these types of advances cover specific customer
expenditure or transactions such as:
▪ Short term bridge financing often provided to
Construction and Real Estate development Organizations
▪ Trade finance advances to cover imports, exports or
local trade i.e. IFF, LPO, TOD, DAUE etc.

79
Medium to Long Term Loans

Most of these facilities fall into two

categories namely:
▪ Term Loans
▪ Revolving Credits

80
Term Loans
▪ These are facilities offered to borrowers having maturities
extending over a period of one to fifteen years.
▪ These facilities are appropriate for customers seeking
permanent increase in working capital or the acquisition of
a fixed asset.
▪ Draw downs are usually in a lump sum or over a very short-
period, with the customer’s account being credited unlike
Overdraft where the customer is allowed to overdraw his
account

81
Term Loans
▪ Repayment often commences immediately or after a grace
period or moratorium and is from the company’s earnings
flow over the period of the facility.
▪ The interest rate most times remains constant for the tenor
of the loan.
▪ Each payment of principal reduces the balance and
subsequent interest is calculated on this reducing balance.

82
Revolving Credits
▪ These are a blend of a term loan and line of credit, often
having a medium term maturity of up to 5 years.
▪ These facilities have the obligation and irrevocable
commitment of the bank to pay out funds to the borrower
up to a maximum of the facility size with pay downs and
withdrawals allowed consecutively.
▪ Although mostly fixed, the facility limit is sometimes
allowed to float by being pegged to an operational activity
such as a proportion of the company’s level of inventory,
receivables etc.
▪ It is most times availed to Corporate customers.

83
Contingent Credits
These are credits that primarily do not involve any physical cash
disbursement except upon crystallisation of specific pre-agreed
underlying events, such as default of a primary obligor.

Types of Contingent Credit include:

▪ Tender or Bid Bond
▪ Performance Bond
▪ Advance Payment Guarantee
▪ Retention Bond
Special Credits
These are credit instruments that have mixed characteristics
of other credit instruments and they include:
▪ Leasing: This is a financing option for the acquisition or
use of an asset.
▪ Leasing is thus defined as a contractual agreement
between the owner of the assets called the Lessor and
the person seeking to use the asset called the Lessee.
▪ Leasing is hybrid in nature, having some of the
characteristics of a term loan, both in terms of duration
and repayment mode.
Special Credits
Accounts Receivable & Inventory Financing: This is
also known as Current Assets Financing, because it is
a source of working capital for a company.

Funds are raised by the assignment of inventory or

receivables to a bank for financing.

The facility is paid down as the firm collects its

receivables or sells down the inventory.
 MODULE 3:

OVERVIEW OF THE
CREDIT PROCESS

87
ATTRACTING CREDIT RELATIONSHIPS

88
ATTRACTING CREDIT RELATIONSHIPS

▪ Banking is all about providing superior service to

customers in order to retain and attract new
customers, be it for receipt of deposits of granting
of loans.
▪ Consequently, to attract credit relationships, banks
would need to do the following among others:

89
ATTRACTING CREDIT RELATIONSHIPS

▪ Targeted, Relevant and Attainable Product Offers:

▪ Customers expect their banks to know who they are.
▪ Beyond issue resolution and financial advice, this means
banks need to know their customers financial situations
and needs, when they initiate conversations.
▪ They expect their banks to use information at their
disposal to ensure product offering are both relevant
and attainable and not just a waste of time.

90
ATTRACTING CREDIT RELATIONSHIPS

▪ Speed and Accuracy :

▪ Customers expect speed accuracy from their banks. And
while digital tools like mobile apps come to mind, it is
actually major credit decisions that tend to eat up most
of a customer's time in a digital fast world.

91
ATTRACTING CREDIT RELATIONSHIPS

▪ Empowering employees to provide exceptional

customer service at all times. Marketing/Credit Officers
should be empowered to take decisions on most
customers request without referring to a supervisor.
▪ Educate customers on financial literacy. Let them know
more about the various credit products available and
how they can use them to grow their businesses. The
bank should be an advisor, not just a lender.
▪ Deliver customer service that is both friendly and
educative.

92
ATTRACTING CREDIT RELATIONSHIPS

▪ Banks should segment their client base and create

personalized customer experiences
▪ Offer attractive loan terms and conditions that are
pocket friendly and much better than what competition
are offering.
▪ Use multiple marketing channels to reach the desired
target/audience.
▪ Tell a good story of what has happened to some of your
existing customers and how others can benefit.

93
FUNDAMENTAL AND FACTORS
AFFECTING LOAN STRUCTURE

▪ Loan structuring involves putting a credit facility for

a customer in clear and precise terms and in a form
that is acceptable to the bank.
▪ Loan structuring considers the following:
▪ What specific step or steps of the company’s asset
conversion cycle should the bank finance? Both the
short term cycle and long term cycle should considered
as applicable.
▪ What portion of item should the bank finance (100%,
80%, 50%etc)?

94
FUNDAMENTAL AND FACTORS
AFFECTING LOAN STRUCTURE

▪ How much control should the bank exercise over the

disbursement, use of funds and repayment of the
facility?
▪ What type of Credit facility would be most appropriate
for the customer and best for the bank based on above?
▪ How long should the facility be for and how should it be
repaid?
▪ What security should be taken?
▪ What special conditions and/or covenants should the
bank impose on the borrower?

95
Loan Structure Achieves the following

1. It converts data into appropriately detailed

recommendations that identify risks, indicate how
risks will be managed and proposes a specific credit
facility and terms of repayment.
2. It presents the analysis in a form that permits
efficient approval, documentation and internal and
external reviews.
3. It formalizes the risk assessment, describes covenants
at protective features that are to be a part of the
transaction and provides a basis for on-going
management of the credit

96
Loan Structure Achieves the following

▪ Credit structuring synthesizes credit evaluation

customer’s needs, banks credit policy and
preference and external constraints into acceptable
document for approval.
▪ Credits are structured to minimize risk to the bank,
satisfy customer’s needs and provide bank
adequate compensation for the risks assumed
▪ The ultimate tests of effective credit structuring are
customer’s acceptance and credit
committee’s/bank’s approval.

97
KEY ELEMENTS OF CREDIT STRUCTURING

▪ Purpose
▪ Facility (types, tenor and amount)
▪ Pricing
▪ Repayment Sources
▪ Amortization
▪ Collateral & Documentation
▪ Covenants
▪ Credit Scoring/Risk Ratings

98
Credit Analysis

99
Credit Analysis

▪ Credit analysis is the method by which a bank

officer calculate the creditworthiness of a
customer/business.
▪ In order words, it is the evaluation of the ability of a
company to honor its financial obligations.
▪ The audited financial statements of a company
should be analyzed before granting or renewing a
loan facility, weather the business is big or small.

100
Credit Analysis

▪ The objective of credit analysis is to look at both

the borrower and the lending facility being
proposed and to assign a risk rating.
▪ The risk rating is derived by estimating the
probability of default by the borrower at a given
confidence level over the life of the facility and by
estimating the amount of loss that the lender
would suffer in the event of default.
Credit Analysis

▪ Credit analysis involves a wide variety of financial

analysis techniques, including ratios and trend
analysis as well as creation of projections and a
detailed analysis of cash flows.
▪ It also includes the examination of:
▪ Collateral
▪ Sources of repayment
▪ Credit history
▪ Management ability

102
Credit Analysis

▪ Analysts attempt to provide the probability that a

borrower will default on its debts and also the
severity of losses in the event of default.
▪ Banks have always relied on the classic credit
analysis of 5Cs of credit using relevant information:
o Character
o Capacity
o Capital
o Collateral
o Conditions

103
CONDITIONS
▪ These are the terms used by bank in respect of
certain things a customer will have to put in place
before an approved loan is disbursed.
▪ These conditions may include:
▪ Acceptance of Letter of Offer
▪ Board Resolution authorizing such acceptance
▪ Execution of all required security documents
▪ Submission of all required documents e.g title
documents, certificates etc.
▪ Evidence of insurance on pledge assets with lenders
interest duly noted
▪ Board resolution authorizing company to charge assets.
COVENANTS

105
COVENANTS

▪ These are legally binding restrictions during the life

of the loan, agreed upon by the borrower and the
bank in a loan agreement.
▪ Covenants are restrictive and geared to monitor the
borrowing company’s performance because of the
long loan period.

106
COVENANTS

▪ Examples of covenants include:

o Minimum Credit annual turnover
o Incurring of additional debts
o Selling of assets
o Capital expenditure
o Cash flow coverage
o Dividend payout
o Ownership change
o Valuation of assets
o Insurance coverage
o Change of location

107
RECOMMENDATIONS

▪ Credit recommendations is the process of concluding a

loan request and for which the loan officer seeks
approval following the various limits set in the bank’s
Credit Policy document.
▪ The relevant approval level for each loan will often
depend upon the loan amount and the risk ratings:
▪ Approval authorities can be categorized into:
❑Individual approval
❑Management Credit Committee (MCC)
❑Board Credit Committee (BCC)

108
TYPES OF LENDING RATIONALE

▪ There basically three types of lending rationale,

namely:
i. Temporary or Seasonal Finance
ii. Working Capital Investment Finance
iii. Cash Flow Financing

109
TYPES OF LENDING RATIONALE

▪ Temporary or Seasonal Finance: This is the

financing of short term seasonal build up of current
working assets for sale at a particular period, like
farm products, children Christmas toys etc.
▪ The facility will be substantially reduced as the
goods are sold and paid for.

110
TYPES OF LENDING RATIONALE

▪ Working Investment Finance: As company expand,

they need more cash to finance new fixed and
current assets, plant and machinery, stock etc.
▪ This is a method of financing a relatively long term
need with short term facility. The level of the need
will generally fluctuate, but has a direct link with
the level of sales.
▪ This type of finance is often on a short-term
revolving basis.

111
TYPES OF LENDING RATIONALE

▪ Cash Flow Financing: This is lending to finance a

company’s medium to long-term needs ( five to
seven years typically)
▪ The loan is very often used to purchase assets
which is expected to generate future cash flow and
contribute towards the repayment of the facility.
▪ These assets being financed by the facility, such as
plant or equipment are usually expected to
produce other assets which when converted to
cash will be used to repay the loan.

112
ASSETS CONVERSION CYCLE

Cash

Raw
Debtors
Materials

Assets
Conversion
Cycle

Work in
Sales
Progress

Finished
Goods

113
ASSETS CONVERSION CYCLE
▪ The Assets Conversion Cycle is an important
analysis tool that allows the Credit Officer to
determine as to
▪ why and when the business needs more cash to operate
▪ when and how it will be able to repay.

114
ASSETS CONVERSION CYCLE

▪ This represents
▪ The number of days it takes a company to purchase its
raw materials
▪ Converts them into finished goods
▪ Sell the finished goods to a customer
▪ Receive payments for the goods sold

115
ASSETS CONVERSION CYCLE

▪ There are three components:

▪ Account Receivable Turnover days
▪ Inventory Turnover days
▪ Account Payable Turnover days

116
 MODULE 4
TYPES OF LENDING AND LOAN
ANAYSIS & STRUCTURING

117
EVALUATING COMMERCIAL LOAN REQUEST
▪ Evaluating a Commercial loan request is the process
of accessing the likely hold that the customer will
repay the loan in line with the terms of approval.
▪ Analysis of credit is as a result of the risks involved
in credit creation. Based on the uncertainty
involved in credit creation every risk must lend
itself for objective analysis

118
EVALUATING COMMERCIAL LOAN REQUEST

▪ Evaluation of Commercial loan request will most

times be made up of :
▪ Quantitative Factors
▪ Quantitative Factors.

▪ These will include :

▪ Purpose of loan- Is it for a legal transaction and within
the object clause of the company? Does it fall within
our target market?

119
EVALUATING COMMERCIAL LOAN REQUEST

▪ Amount to be borrowed : Does the company have the

borrowing powers for the amount?
▪ Is the amount within the Bank’s single obligor limit ?
▪ Duration- Tenor should be short term and will the
company be in a position to repay the facility within the
period.
▪ Source of repayment: The first source of repayment
should be from the cash flow of the business and this
should be enough to liquidate the facility as at when
due.

120
EVALUATING COMMERCIAL LOAN REQUEST

▪ Profitability of the Transaction: The transaction

must be profitable enough for the company to be
able to pay the bank’s interest and other charges,
with some returns for the business owners.

121
EVALUATING COMMERCIAL LOAN REQUEST
▪ The bank would also need to evaluate the customer
using the time honored 5Cs of Credit:
▪ Character
▪ Capacity
▪ Capital
▪ Collateral
▪ Conditions

122
EVALUATING COMMERCIAL LOAN REQUEST
▪ Quantitative Analysis- This will involve the review
of the company’s last 3 years financial statement on
the bank’s spread-sheet document for the
customer’s sector.
▪ This will enable the Credit Analyst to use financial
ratios to evaluate company’s operating and
financial performance in the following areas
▪ Profitability
▪ Liquidity
▪ Activity
▪ Solvency

123
EVALUATING COMMERCIAL LOAN REQUEST

▪ Account Profitability Analysis with the Bank: This

will entail the review of the customer’s last 3 years
account activities to include:
➢Credit Turn over
➢Gross Earnings ( Interest and other commission charged
on the account)
This is to ascertain if the relationship has been profitable.

124
 MODULE 5

LEGAL ASPECTS OF BANKING

AND SECURITIES FOR LENDING

125
Role & Responsibilities of Customer Facing
Business Unit

▪ Marketing of Credit Product:

▪ Loan product development
▪ Engaging customer who may consider loan products
▪ Initiate applications
▪ Documentations:
▪ Inform customers of documentations
▪ Obtain all necessary documents
▪ Safe keeping of all document and information/data
▪ Availment & Monitoring:
▪ Credit processing
▪ Obtaining documentations on collaterals
▪ Engaging all stakeholders
▪ Establishing terms and conditions with customers

126
Role & Responsibilities of Customer Facing
Business Unit
▪ Loans are a Bank’s primary source of income.
▪ The Customer Facing Units (Loan Officers) are very
important in the process of granting credit facilities.
▪ The Loan Officers professional knowledge of
business and industry is central to the success of
the lending activities of the bank.
▪ Their level of professionalism determines a bank’s
success in it’s local market vis a vis competition.

127
Role & Responsibilities of Customer Facing
Business Unit
▪ Engagement: It is the role of the Loan Officers to
engage the customer for discussions on their loan
request to ask all necessary questions and agree on
initial terms and conditions.

▪ Legality of Request- It is the responsibility of the

customer facing units to check that the loan
request pass the legality test.
Role & Responsibilities of Customer Facing
Business Unit

▪ Target Market: The Loan Officers will also confirm

if the customer falls within the bank’s approved
target market and meets other conditions stated in
the Credit Policy.

▪ It is the role of the customer facing units to initiate

the credit request by writing the Credit Analysis
Memorandum (CAM), which will state all necessary
information and give clear justification for the
credit exposure.

129
Role & Responsibilities of Customer Facing
Business Unit

▪ Credit Risks Analysis: The various key credit issues

peculiar to the request should be highlighted such
as
▪ Demand Risk
▪ Industry Risk
▪ Competition Risk
▪ Diversion Risk
▪ Supply/Supplier Risk
▪ The various mitigants to these risks should be discussed
and put in place where possible

130
Role & Responsibilities of Customer Facing
Business Unit
▪ The write up should contain verified factual
information supported by evidence and should
leave no room for ambiguity or doubt for the
approving officers.
▪ The Originating Loan Officer should carry out the
necessary financial analysis of the company’s
audited accounts for the past three years.
▪ They should carry out the customer’s business
analysis and Industry Analysis.

131
Role & Responsibilities of Customer Facing
Business Unit

▪ Letter of Offer: After the approving officers are satisfied

with the credit request, it should be presented to Credit
Risk Management (CRM) for further review.

▪ If CRM finds the proposal good and approval is granted

by the final approving authority. The Originating
Business Unit has the responsibility to communicate
the approval to the customer via the bank’s standard
Letter of Offer stating all the terms and conditions of
approval for the customer’s review and acceptance.

132
Role & Responsibilities of Customer Facing
Business Unit

▪ Collateral: Once the customer accepts the Offer, it

is the responsibility of the Business Unit to collect
all the security documents pledged for the facility
and ensure all legal documents are properly
executed. The title documents together with the
executed charge documents will be handed over to
the Legal Department for perfection

133
Role & Responsibilities of Customer Facing
Business Unit
▪ Disbursement: It is also the responsibility of the
Business Unit to see to the immediate
disbursement of the facility after all conditions
precedent to drawdown have been met.
▪ They will also ensure that all agreed upfront
charges are collected from the customer’s account.

134
Role & Responsibilities of Customer Facing
Business Unit
▪ Monitoring: Credit monitoring is an essential
responsibility of the Business unit. Once a credit is
booked, it is critical to closely monitor the
performance of the facility account to ensure
timely and orderly repayment of the credit.
▪ They will need to check for early warning signs that
suggest the facility should be placed on watch list.

135
Role & Responsibilities of Customer Facing
Business Unit
▪ Loan work-out: Once a credit is showing obvious signs
of delinquency or is becoming hardcore, it is the
responsibility of the business unit in conjunction with
Credit Risk Management to put in place a concrete
loan work out arrangement that optimizes the bank’s
position on the credit.

▪ Loan work out is an effort by which a loan is collected

in whole or in part from a customer experiencing
serious financial difficulties. It involves negotiation and
restructuring of a problem loan asset, its follow up and
collection.

136
Review of Appropriate Securities for Bank
Lending.

137
Review of Appropriate Securities for Bank Lending
▪ Collateral is a property or other asset of value a
customer offers to the bank to secure a loan facility
▪ If the facility is not repaid as at when due, the bank can
sell the charged asset to recover its money.
▪ In taking a security, the bank acquires the right over
and above the basic contractual right to sue customer
if payment is not met.
▪ Security can be classified into personal security and real
security.
▪ A security can be given either by the borrower or a
third party

138
Why do Banks need Security
• It is an assurance that the Borrower would most likely
honour its obligation
• It is an additional comfort to a mere promise of the
Borrower
• Risk of non-payment is minimized when the Borrower
provides an alternative means for fall back on in the
event of default to repay
• A secured creditor has greater control over his debtor
• An unsecured creditor usually has to resort to litigation
in order to recover its funds

139
Acceptable Securities

140
Acceptable Securities- Landed Property.

▪ This refers to the use of landed property as security

for a loan facility, either in form of a transfer of
ownership or by a deposit of title documents

141
Acceptable Securities- Landed Property
▪ Landed Property.
▪ It is important that the property is developed, has a title
document, which should be submitted.
▪ A search is conducted at the land registry to confirm the
true owner and that there is no previous charge on it.
▪ The bank’s charge on the property should be registered
at the land’s registry.
▪ The property should be valued
▪ Fire Insurance should be taken over the property with
the bank as first loss payee.

142
Acceptable Securities- Landed Property

• Legal Mortgage refers to the transfer of ownership

of a landed property by the Borrower or Mortgagor
to the Creditor or Mortgagee to hold title to the
property pending the liquidation of the facility

• A legal mortgage must be registered at the lands

registry

143
Acceptable Securities- Landed Property

• Equitable Mortgage can be created by the simple deposit of

title document with or without a memorandum of deposit:

• It is inferior to a Legal Mortgage

• No transfer of ownership as in Legal Mortgage

• It can not be registered at the Lands Registry

• Cannot sell without an order of court

144
Acceptable Securities- Debenture Charge
▪ Debenture is a charge over the assets of a
borrowing company given to the bank to secure a
loan facility.
▪ The charge could be fixed, floating or all assets

145
Acceptable Securities- Debenture Charge

• It is a documentary acknowledgment issued by a

company as evidence of its indebtedness, when the
assets of the company are charged
• The Borrower can still carry out its business in the
ordinary course of business until the creditor calls
in the facility

• The creditor does not have control over the assets

charged until crystallization

146
Acceptable Securities- Debenture Charge
• Upon default, the creditor can appoint a receiver to
take over the company and manage its affairs for
the benefit of its creditors

• Note that all charges must be registered at the

Corporate Affairs Commission (CAC).

147
Acceptable Securities- Stocks & Shares

▪ The shares should be from a public limited

liability company traded in the Nigerian Stock
Exchange.
▪ Ownership should be verified at the Exchange.
▪ Transfer of ownership should be registered at
the Exchange
▪ A bank can not accept its own shares as
collateral.

148
Acceptable Securities- Life Insurance Policy
This is a contract whereby the insurer in consideration of a
certain premium, which may be payable in monthly or annual
installments, undertakes to pay the beneficiary of the policy a
sum or annuity upon the death of the life assured or at a
stated date.
The following are important
▪ The age of the policy
▪ Amount of the premium and if paid to date.
▪ Surrender value of the policy
▪ Age of the assured must have been admitted
▪ The policy holder is permitted to assign his interest.
▪ A written notice of the assignment should be served on
the Insurance company.
149
Acceptable Securities- Cash Balance
▪ Cash as collateral for loan is not common but very
simple to use.
▪ The customer will use the credit balance in a
Savings or Deposit account to secure a loan facility.
▪ The Savings or Deposit account may belong to a
third party.
▪ In the event of a default, bank can use the credit
balance in the account to liquidate the loan facility.

150
Acceptable Securities- Domiciliation of Invoice
Payment.
▪ This is one of the other types of collateral used by
small businesses, where the customer domiciles of
payment of Invoices for work already executed to
the bank.
▪ The customer instructs his debtor to make the
expected payment to his account with the bank
directly without further recourse to him.
▪ Upon due date, the customer third payment is
expected to make payment to the advised bank
account, which proceeds will be used to liquidate
outstanding loan granted to the customer.

151
Acceptable Securities- Guarantee
▪ This is a written promise by one person (Guarantor)
to repay a debt of another person who should
make payment (principal debtor) but does not.
▪ Before accepting a guarantee, it is essential to
ascertain the financial position of the proposed
guarantor.
▪ Joint Guarantees: This involves two or more people
guaranteeing a debtor. Persons giving this type of
guarantee must accept liability jointly and severally.
▪ Corporate Guarantee can be issued by a limited
liability company under the seal of the company.

152
Acceptable Securities- Stock Hypothecation

▪ Stock Hypothecation: This is a form of security

used, where it is impracticable to give possession of
goods to the lender.

▪ It gives the bank the right, in preference to other

creditors, to have the goods hypothecated satisfy
the facility secured.

153
PERFECTION OF SECURITIES

▪ Perfection of securities depends on the precise

type of security involved.
▪ It is important that the title of any property offered
as security is investigated and shown to be good.
▪ The necessary documents signed by the
customer/owner of the collateral.

154
PERFECTION OF SECURITIES
▪ Obtaining any consents required by law like in
landed property.
▪ Stamping the document executed where necessary
▪ Registration of the charge over the collateral at the
Land Registry, Corporate Affairs Commission and
other relevant places required by law.

155
EARLY PROBLEM RECOGNITION
▪ All Credit Officers are expected to be proactive in
the management of credit facilities.
▪ There are some early warning signals that suggest
that an account should be placed on watch list.
▪ Once any of them is noticed on a facility account,
the responsible office should start making
immediate arrangements to call in the facility for
full repayment before it gets too late:

156
EARLY PROBLEM RECOGNITION
▪ These signals include the following:
▪ Low and unusual account activities
▪ Late repayment of monthly loan dues
▪ Non payment of monthly interest charges
▪ Large and unexpected additional loan request
▪ Overdraft account developing into hardcore
▪ Frequent amendments to Term Loan covenant at instance of
the customer
▪ Credit refusal by other banks
▪ Borrowing continues after seasonal need is over
▪ High incidence of returned cheques on the account
▪ Declining profit margins
▪ Slow down in debt collection period
▪ Ant adverse industry information, including regulatory.

157
Review of the Bank’s Credit Policy Guide

158
About the Credit Policy Manual
▪ A bank’s Credit Policy contains a set of principles on the
basis of which it determines who it will lend money to
or give credit.
▪ In simple terms, the Credit Policy of a bank is a set of
guidelines that highlights the following points:
o The terms and conditions for giving a Credit.
o Customer Credit worthiness
o Collection Procedure
o Precautionary Steps in case of customer default.

159
About the Credit Policy Manual
▪ All lending process is characterised by various risks.
▪ The importance of Credit Policy is therefore, to
establish parameters that help minimise these risks
by instituting a watertight lending principles.
▪ The quality of banks risk assets is a reflection of its
Credit Policy and effectiveness of that Policy

160
About the Credit Policy Manual
▪ Credit Policy must be written formally and passed to
Management by the Board of Directors for
implementation.
▪ The Credit Policy Manuals are then kept with the Credit
Policy Supervision Group.
▪ The Policy is not static and therefore must be flexible to
reflect the changes in the Macro Environment both
cyclical and secular.
▪ Such changes in Credit Policy must be formalized and
approved by the Board of Directors.

161
About the Credit Policy Manual
▪ A well written and flexible Credit Policy is a
permanent source of reference for those charged
with implementing the policies.
▪ The objective here is to ensure that no one is left in
doubt as to the bank’s position on any lending or
credit issues at all times.
▪ Effective communication of the Credit Policy and
changes therein is essential to its success.

162
Goals and Objectives of Credit Policy Guidelines
▪ The creation of sound and collectible Loans.
▪ The development of profitable Investment outlets
for the bank’s deposits
▪ To grant credits that meet the legitimate needs of
the banks customers.
▪ To control the bank’s overall lending activity
▪ Facilitates the achievement of regulatory
requirements in credit volumes and quality.

163
Goals and Objectives of Credit Policy Guidelines
▪ Ensure uniformity in credit communication.
▪ To maintain acceptable credit standards.
▪ Guide Lending Officers in balancing the quality and
quantity of their lending portfolios in the pursuit of
profitability.
▪ Keep Portfolio Risks within acceptable limits, in
order to minimize losses.
▪ Ensure Risk Assets and Balance Sheet liquidity
management

164
Effective Credit Policy Implementation
▪ This calls for discipline of the mind from the top to
bottom of all cadres of Officers and Management
connected with credit creation and supervision in
the bank.
▪ Consciousness of the Corporate objective should
supersede individual objectives and eliminate
myopic tendencies among lenders.
▪ The prerequisites for the effective implementation
of Credit Policy are therefore as follows:

165
Effective Credit Policy Implementation
▪ First, there must be a full commitment of Senior
Management to the bank’s credit policy
▪ Second is the enforcement of a strong credit
culture
▪ Next is to ensure accountability for a breakdown in
credit policy

166
Effective Credit Policy Implementation
▪ Also essential for effective implementation of credit
policy involves the use of credit review and
Inspectorate or Audit Staff in monitoring
compliance with credit policies.
▪ Also important is the separation of Credit and
Lending functions.

167
Indicators of weakness in
Credit Policy

▪ Outside Target Market lending.

▪ Unauthorised and above limit lending by Loan
Officers
▪ Undefined Credit standards.
▪ Liberal and unenforced loan terms, such as
disregard for conditions precedent to draw down
Indicators of weakness in
Credit Policy

▪ Industry and client over exposures

▪ Unplanned and excessive loan growth
▪ Inadequate credit and cash flow analysis
▪ Inadequate Risk Assets review and monitoring
systems.
▪ Dwindling profitability due to loan loss provisioning

169
Indicators of weakness in
Credit Policy

▪ Solutions:
▪ Establishment and formalization of clear credit policies.
▪ Supervision and enforcement of credit policy
implementation at senior levels
▪ Recruitment and training of skilled loan personnel, with
a full indoctrination of the bank’s lending policy
▪ Periodic review of credit policy to ensure continues
relevance and adequacy.

170
Class Exercise

• What are the purpose of

credit policy?

• Factors affecting credit

policy thrusts of banks?

171
 MODULE 6
MAJOR CREDIT PRODUCTS,
THEIR PECULARITIES, THE RISKS
AND MITIGANTS

172
CREDIT PRODUCTS
▪ Credit Products means any and all commitments or
obligations under which a bank agrees to make
payments on behalf of or for the account of the
borrower, to facilitate transactions between the
borrower and third parties.

173
OVERDRAFT
▪ These are short term facilities usually structured to
cover seasonal swings in the working capital of a
borrower.
▪ Usually the bank would analyse the company’s
operations to identify projected cash flow trends
and then establish the peak funding requirements
over a defined period of 6-12 months.
▪ Overdraft are availed to meet customer’s working
capital needs and not for fixed expenditures.

174
OVERDRAFT
▪ An Overdraft occurs when withdrawals from a bank
account exceed the available balance which gives the
account negative balance.
▪ The facility offers flexibility to the borrower as draw
downs on the line are only made as the need arises.
▪ Interest is therefore only charged on the drawn portion
of the line.
▪ Pay downs are also made on the line as the company’s
cash flow improves.
▪ It is repayable on demand by the bank at anytime.

175
INVENTORY FINANCE

176
INVENTORY FINANCE
▪ This is a line of credit given to a customer to
purchase goods for sale.
▪ These goods/inventory usually serve as collateral
where the customer is unable to provide other
securities to back up the request.
▪ It also provides a solution to seasonal cash flows in
addition in helping businesses reach a higher sales
volume.

177
LEASES

178
LEASES

• Leasing: This is a financing option for the acquisition or

use of an asset.
• Leasing is thus defined as a contractual agreement
between the owner of the assets called the Lessor and
the person seeking to use the asset called the Lessee.
• Leasing is hybrid in nature, having some of the
characteristics of a term loan, both in terms of duration
and repayment mode.

179
LEASES
▪ There are basically three types of Lease Facility.
▪ Finance Lease- This is the most popular.
▪ Here the Lessor (Finance Company) is typically the legal
owner of the asset for the duration of the lease.
▪ The Lessee not only has operating control over the
asset, but also has a substantial share of the economic
risk and returns.
▪ The Lessee will become the owner of the asset at the
expiration of the agreed rental payments.

180
LEASES

 Operating Lease- This is the opposite of the

Finance Lease.
 The Owner (Lessor) permits the User (Lessee) to
use an asset for a particular period of time, which
is shorter than the economic life of the asset.
 The owner does not transfer all the risk and
benefits to the Lessee

181
LPO FINANCE

▪ This refers to the demand by the customer to raise

funds to meet specific local materials supply
obligations.
▪ Loan amount usually does to exceed 70-80% cost of
supply
▪ Repayment is usually from proceeds of the LPO after
payment has been made by the company that awarded
the contract.
▪ Most times the LPO collateralizes itself as payment are
domiciled to the bank by the customer.

182
LPO FINANCE

▪ The authenticity of the LPO need to be ascertained,

the experience of the obligor is critical to mitigate
performance risk.
▪ Availability of the materials, quality, specification,
lead or delivery time, profit margin and credibility
of the LPO issuer are very important.

183
IMPORT FINANCE

▪ This is a Trade Finance facility that the bank avails its

customers to enable them finance the importation of
goods.
▪ The facility is usually for a specific period of time i.e.
90days, 120days etc to end upon the arrival or sale of
the goods.
▪ The customer is required to contribute a certain
percentage of the value of the import i.e. 20-40%, while
the bank provides the balance.
▪ The shipping documents for the goods are sent to the
bank as the goods most times form part of the
collateral for the facility.

184
TRADE FINANCE
▪ This signifies the financing of trade and it concerns
both domestic and international trade transactions.
▪ Trade Finance can manifest itself in the form of
provision of working capital to support the business
of the customer and most times this could be an
Overdraft facility tied specifically to the trade
business.
▪ There are other credit products and services to
support Trade finance like Letter of Credit, Bills for
Collection, Bank Guarantee and Export Finance.

185
EXPORT FINANCE
▪ This is the process of providing cash flow for exporters of goods.
▪ The exporter gets the necessary financing from their bankers,
which allows them sell products to their customers in another
country before payments are received.
▪ The customer is expected to provide confirmed invoice from the
importer (buyer) to the bank which will determine how much
support the bank will provide.
▪ The facility is usually for a specific period of time ie 60,90 or 180
days as the customer is to repay the facility with proceeds of sale
of the goods exporter.

186
TERM LOANS
▪ These are facilities offered to borrowers having
maturities extending over a period of one to fifteen
years.
▪ These facilities are appropriate for customers
seeking permanent increase in working capital or
the acquisition of a fixed asset.
▪ Draw downs are usually in a lump sum or over a
very short-period, with the customer’s account
being credited unlike Overdraft where the
customer is allowed to overdraw his account.

187
TERM LOANS

▪ Repayment often commences immediately or after

a grace period or moratorium and is from the
company’s earnings flow over the period of the
facility.
▪ The interest rate most times remains constant for
the tenor of the loan.
▪ Each payment of principal reduces the balance and
subsequent interest is calculated on this reducing
balance.

188
BILLS FOR COLLECTION
 This is the handling by banks of financial & commercial
documents for its customer in accordance with instructions
received from the exporter in order to :
▪ Obtain payment or Acceptance
▪ Deliver documents against payment and/or acceptance
▪ Deliver documents or other terms & conditions

189
BILLS FOR COLLECTION

▪ The major participants of a Bill of Collection

transaction are :
1) The Buyer/Importer/Applicant/Drawee
2) The Seller/Exporter/Beneficiary/Drawer/
3) Payee ( incase of domiciliation of proceeds)
4) The importer’s bank/collecting bank
5) The Exporter’s bank/Remitting bank.

190
LETTERS OF CREDIT

• Documentary Letter of Credit is a document from

a bank (Issuing bank) assuring that a seller
(beneficiary) will receive payment up to the
amount of the Letter of Credit as long as certain
documentary conditions have been met.

191
LETTERS OF CREDIT
▪ There are four parties to a Letter of Credit (LC):
1. Applicant: This is the importer and customer of the bank
who opens the LC for payment of goods being imported.
2. Issuing Bank: This is the importer’s banker who issues the
LC.
3. Advising Bank: This is the bank that informs the beneficiary
(exporter ) that a Letter of Credit opened by an Issuing Bank
for an applicant (importer) is available. Advising Bank’s
responsibility is to authenticate the LC issued to avoid fraud
and ensure payment.
4. Beneficiary: This is the exporter and the recipient of the
proceeds of the Letter of Credit

192
LETTERS OF CREDIT

193
LETTERS OF CREDIT
▪ Types of Letter of Credit:
▪ Confirmed Letter of Credit: This is where the advising
bank adds its confirmation on the LC and undertakes to
pay the beneficiary (seller).
▪ LC confirmation is usually requested if the seller is not
comfortable with the creditworthiness of the Issuing
bank and/or is concerned over the buyer’s country risk

194
LETTERS OF CREDIT
▪ Irrevocable LC: This is a firm commitment by an
Issuing bank to an Accepting bank that payment
will be made provided the agreed terms and
conditions are met. This type of LC can not be
amended or cancelled without the written approval
of the beneficiary.
▪ Red Clause LC: Here the confirming bank is
authorised to make advance to the beneficiary
prior to the presentation of the required
documents for negotiation.

195
LETTERS OF CREDIT
▪ Transferrable LC: This is where an LC can be
transferred from the original beneficiary to another
beneficiary.
▪ Back to Back LC: This requires the issuance of a 2nd
LC at the request of the beneficiary of the original
one in favour of a 2nd beneficiary. This usually
occurs where the LC is not transferrable.

196
Case Study

Let’s assume, a Company XYZ purchases the goods worth

$100,000 from an overseas supplier called Company ABC.

On the demand of ABC, the Company XYZ approaches its Bank for
issuing bank credit letters in the favor of ABC. After shipping goods,
the Company ABC asks for the payment of $100,000 from XYZ’s
bank by presenting shipping documents.

The XYZ’s Bank pays company ABC, it turns out to Company XYZ
to reimburse the issuing bank.

197
BANK GUARANTEES

198
BANK GUARANTEES

▪ This is a specific promise of a bank to pay to

another financial institution, company or
organization for the third party in case if it fails to
comply with its obligations indicated in a particular
contract.
▪ All Bank Guarantees must state the amount,
purpose for which the guarantee is issued, specific
expiry date and a specific claim period.

199
BANK GUARANTEES

▪ Bank Guarantees are contingent in nature and do

not involve any physical cash disbursement except
upon crystallisation of specific pre-agreed
underlying events, such as default of a primary
obligor.

200
TYPES OF BANK GUARANTEES

▪ Advance Payment Guarantee: This is a guarantee by

a bank for its customer, pledging to refund any
advance or progress payments received by the
customer in the event that the customer fails to
fulfil his own part of the terms and conditions of
the contract.

201
TYPES OF BANK GUARANTEES

▪ Performance Bond: This is a guarantee by a bank to

a third party, evidencing that its customer has
adequate resources and technical competence to
execute a given contract to completion in line with
the terms and conditions.

202
TYPES OF BANK GUARANTEES

▪ Tender or Bid Bond: This is a guarantee given by a

bank in support of a contractor evidencing the
genuineness of the contractor with regards to
complying with the conditions of the bid.

203
TYPES OF BANK GUARANTEES

▪ Retention Bond: This is a guarantee by a bank to a

third party, for its customer, attesting to the quality
of work which the customer is to execute.
▪ It is meant to ensure post-completion satisfaction
and it covers the post completion warranty period.

204
PROJECT FINANCE
▪ Project Finance is the funding of large long term
infrastructure, industrial projects and public
services.
▪ In view of the usual large amount involved, a
syndicate of banks or other lending institutions
come together to provide loans for such projects.
▪ This type of lending is usually handled by the
Corporate Banking Sector of most banks.

205
 MODULE 7

COLLECTIONS MANAGEMENT &

CREDIT MONITORING

206
MONITORING AND TRACKING FACILITIES
Financial Institutions have faced difficulties over the
years for a multitude of reasons, the major cause of
serious banking problems continues to be directly
related to:
▪ lax credit standards for borrowers and counterparties
▪ poor portfolio risk management
▪ lack of attention to changes in economic or other
circumstances that can lead to a deterioration in the
credit standing of a bank’s counterparties.

207
MONITORING AND TRACKING FACILITIES
▪ Credit risk is most simply defined as the potential that a bank borrower
or counterparty will fail to meet its obligations in accordance with
agreed terms.
▪ The goal of credit risk management is to maximise a bank’s risk-adjusted
rate of return by maintaining credit risk exposure within acceptable
parameters.
▪ Banks need to manage the credit risk inherent in the entire portfolio as
well as the risk in individual credits or transactions. Banks should also
consider the relationships between credit risk and other risks.
▪ The effective management of credit risk is a critical component of a
comprehensive approach to risk management and essential to the long-
term success of any banking organisation.

208
MONITORING AND TRACKING FACILITIES
▪ For most banks, loans are the largest and most obvious
source of credit risk; however, other sources of credit risk
exist throughout the activities of a bank, including in the
banking book and in the trading book, and both on and
off the balance sheet
▪ Since exposure to credit risk continues to be the leading
source of problems in banks world-wide, banks and their
supervisors should be able to draw useful lessons from
past experiences.
▪ Banks should now have a keen awareness of the need to
identify, measure, monitor and control credit risk as well
as to determine that they hold adequate capital against
these risks and that they are adequately compensated for
risks incurred.
209
MONITORING AND TRACKING FACILITIES
▪ Credit Monitoring and tracking is an essential part
of credit process.
▪ It is critical the Credit Officer closely monitor the
performance of the loan account to ensure timely
and orderly repayment of the facility.
▪ The primary responsibility for credit monitoring and
collection rests on the Responsible Credit Officer to
ensure that the facility runs in accordance with
approved terms and conditions.

210
MONITORING AND TRACKING FACILITIES
▪ The Credit Officer is to also ensure the identification
of early signals on credits and proffer effective and
efficient remedial measures.
▪ There should be an information system and analytical
techniques that enable management to measure the
credit risk inherent in all on and off balance sheet
activities.
▪ A management information system that should
provide adequate information on Credit Risk
Management and the composition of credit portfolio,
including identification of any concentration risk.

211
LOAN LOSS FORECASTING & RECOGNITION: GAAP &
Prudential Guidelines –Non Performing Loans
▪ In CBN’s revised Prudential Guidelines of 2010, it
directed Commercial Banks to classify their Credit
facilities as either performing or non-performing as
defined hereunder:
▪ A credit facility is deemed to be performing if payments
of both principal and interest are up-to-date in
accordance with the agreed terms
▪ A credit facility should be deemed as non-performing
when any of the following conditions exists
▪ Interest or principal is due and unpaid for 90days or more
▪ Interest payments equal to 90days interest or more have been
capitalized rescheduled or rolled into a new loan.

212
Provision for Non-Performing Facilities
▪ Non-performing credit facilities are classified into three
categories namely:
▪ Sub-Standard: facilities on which unpaid principal and/or
interest remain outstanding for more than 90 days or less
than 180days.
▪ Doubtful: facilities on which unpaid principal and/or interest
remain outstanding for at lest 180days but less than 360days
and are not secured with legal title to a leased assets or
perfected realizable collateral in the process of collection or
realization.
▪ Lost: facilities on which unpaid principal and/or interest
remain outstanding for 360days or more and are not secured
by legal title to leased assets or perfected realizable collateral
in the course of collection or realization.

213
Provision for Non-Performing Facilities
▪ Banks are required to make adequate provisions for
perceived losses based on the credit portfolio
classification.
▪ Specific provisions to be made:
▪ Interest overdue for more than 90days should be
suspended and recognized on cash basis only
▪ Principal repayments that are over due by more than
90days should be fully provided for and recognized on
cash basis.

214
Provision for Non-Performing Facilities
▪ For principal repayments not yet due on non-
performing facilities, provision should be made as
follows:
▪ Sub-Standard facilities: 10% of the outstanding balance
▪ Doubtful facilities: 50% of the outstanding balance
▪ Lost facilities: 100% of the outstanding balance

215
IAS 39 Incurred Loss Model Vs IFRS 9
Expected Credit Loss Model.
▪ During financial crisis, the delayed recognition of credit losses
on loans and other financial instruments are considered as a
weakness in view of the existing accounting standards.
▪ Specifically, the existing model in IAS 39 (an 'incurred loss'
model) delays the recognition of credit losses until there is
evidence of a trigger event.
▪ Post the crisis, the International Body for Accounting Standards
(IASB) saw the need to be proactive in recognizing the losses.
▪ Hence, IASB issued a fresh set of guidelines for Financial
Instruments - IFRS 9 .
▪ Impairment is one of the phases / areas covered by the IFRS 9
guide lines to handle expected credit losses.

216
IAS 39 Incurred Loss Model Vs IFRS 9 Expected
Credit Loss Model
▪ The expected credit loss guidelines of IFRS 9 are
more proactive and forward looking in terms of loss
recognition.
▪ Reserving for loan loss is one of the most important
accounting aspects for banks. Its objective is to cover
estimated losses on impaired financial instruments
due to defaults and non-payment.
▪ Reserve measurement affects both the balance sheet
and income statement. It impacts earnings, capital,
dividends and bonuses, and attracts the attention of
bank stakeholders ranging from the board of
directors and regulators to equity investors.

217
Expected Credit Losses
▪ IFRS 9 requires recognition of impairment losses on a
forward looking basis which means that impairment
loss is recognized before occurrence of any credit
event.
▪ These are referred to as Expected Credit Losses (ECL).
▪ Under the ‘expected credit loss model’, an entity
calculates the allowance for credit losses by considering
on a discounted basis the cash shortfalls it would incur
in various default scenarios for prescribed future
periods and multiplying the shortfalls by the probability
of each scenario occurring.

218
Expected Credit Losses
▪ The allowance is the sum of these probability
weighted outcomes. Because every loan and
receivable carries with it some risk of default, every
such asset has an expected loss attached to it, from
the moment of its origination or acquisition.
▪ Expected Credit Loss (ECL) measures an asset’s
credit risk.

219
LOAN WORKOUT TECHNIQUES
▪ Loan workout is an effort by which a loan is collected
in whole or in part from a customer experiencing
serious financial difficulties.
▪ It involves negotiation and restructuring of a problem
loan, its follow up and collection.
▪ Once a credit is showing obvious signs of delinquency
or is becoming difficult to collect, urgent steps should
be jointly taken by the Credit Officer and Credit Risk
Management Department to put in place a concrete
loan work arrangement that optimizes the Bank’s
position.

220
LOAN WORKOUT TECHNIQUES
▪ The first step in the loan workout process is to
clearly identify what went wrong.
▪ In order words, identify the key cause of the credit
delinquency.
▪ Once the cause of the loan delinquency has been
established by the Account Officer , any of the
following remedial measures should be adopted:
▪ Renegotiation of the loan terms(interest, tenor,
conditions, covenants, collateral etc)
▪ Demand for payment within a specified period of time.

221
LOAN WORKOUT TECHNIQUES cont’d
▪ Appoint a Receiver, should customer be unable to pay
within the specified period of grace.

▪ Foreclosure and realization of collateral for liquidation of

outstanding loan balance.

222
PROACTIVE DEBT COLLECTION STRATEGIES
▪ Improved Collections start from good customer
acquisition processes – identifying and managing
risk at its origination.
▪ Start small with a long-term goal and make step by
step improvements to processes and systems
▪ Early and consistent contact with credit customers
▪ Select External Agents very carefully and monitor
them closely.

223
PROACTIVE DEBT COLLECTION STRATEGIES
▪ Measure performance and provide incentives for
Debt Collectors and Account Managers.
▪ Put in place centrally defined collection tools for all
Debt Collection Agents.
▪ Provide effective and targeted communication
scripts for all appointed Debt Collector Agent for
them to speak the same language with customers.
▪ Invest in continuous learning of all credit officers.

224
ROLE OF DEBT COLLECTION AGENCIES
▪ Debt Collector Agency is a Company that is in the business
of recovering of money that is owed on delinquent accounts
to a bank.
▪ Many banks and other financial institutions will turn to
Collection Agencies when they fail to collect their own
debts.
▪ Collection agencies will work with creditors to obtain the
necessary information before seeking out the debtor.
▪ Creditors have access to a computer database made
available by credit bureaus.
▪ The information from the database can be used to find
debtors even if they have moved away from their original
location.

225
ROLE OF DEBT COLLECTION AGENCIES
▪ Their process of collection include:
▪ Debtor Tracing
▪ Investigation of Debts
▪ Field Calls on debtors for early & negotiated
settlement.
▪ Recovery through the law courts

226
Class Exercise

What are the Measures to avoid

bad and doubtful debts?

227
 MODULE 8

CREDIT WRITING &

PRESENTATIONS

228
CREDIT WRITING IMPERATIVES.
▪ In writing a credit, the first thing is for the Account
Officer to gather all necessary information about
the proposed facility from the customer.
▪ It is important that the Account Officer gets the
correct and complete information from the
customer that will guide him in preparing the Credit
proposal.
▪ The Credit Officer must review the request
objectively without any bias especially towards the
customer.

229
CREDIT WRITING IMPERATIVES
▪ The Financial Statements of the customer must be
reviewed and included in the proposal to aid
decision making.
▪ It is important that the Credit Officer presents the
complete package/proposal in a very clear and
concise manner that will aid the decision making of
the supervisor and management without repeated
back & forth on many issues.

230
STANDARD CREDIT MEMO CONTENTS
▪ Credit proposal are usually presented through the
approval process in a standard credit memo which
is expected to contain the following:
▪ Customer Credit Brief- This document is usually in a pre-
designed form which will contain basic information
about the customer including name, address , nature of
business etc.
▪ Credit Analysis Memorandum (CAM)- This is the credit
proposal write up, which is expected to be very
informative and analytical with every aspect of it aimed
at providing sufficiently clear justification for a credit
exposure.

231
STANDARD CREDIT MEMO CONTENTS
▪ The Credit Analysis Memorandum should include the
following:
1) Customer’s Business Analysis incorporating, company’s
history, management profile, their products & services,
operating process & cycle etc.
2) Industry Risk Analysis- nature, business size, key players,
competition, key success factors, opportunities & threats,
future outlook etc
3) The Request- Facility type, amount, tenor, pricing, purpose,
transaction dynamics, terms & conditions, security listing
etc.
4) Account Profitability Analysis- Credit turn on account, gross
earnings
5) Conclusion and Recommendations

232
STANDARD CREDIT MEMO CONTENTS
▪ Three-consecutive-year financial spreadsheet- Company’s financials for
the last three years should be spread out in a standard pc base spread
sheet.

▪ Risk Rating Sheet: Each customer will be risk-rated automatically based

on financial/quantitative and non-financial/qualitative factors in the
bank’s risk rating system.

▪ Valuation Report: For credit proposals that include properties or assets

as part of its security package, professional valuation report from a
reputable Estate Valuers on such properties/assets should be presented.

▪ Credit Bureau Report: This will help reconfirm the customer’s credit
history from other banks

233
PRESENTATION OF CREDIT FOR MANAGEMENT
CREDIT COMMITTEE
▪ All credit proposals are expected to have been
reviewed and packaged by the Responsible Account
Officer, who after satisfying himself will forward
same to the Regional Manager/Group Head for
further review and endorsement.
▪ Thereafter, depending on the amount, the proposal
will be forwarded to Credit Risk Management
(CRM) Division, where the credit will be thoroughly
assessed to ascertain the following:

234
PRESENTATION OF CREDIT FOR MANAGEMENT
CREDIT COMMITTEE
▪ Customer falls with the Bank’s target market
▪ Request is in compliance with the Bank’s Credit
Policy as well as other regulatory policies.
▪ Request meets the bank’s minimum risk acceptance
criteria
▪ Adequacy and reliability of the primary source of
repayment

235
PRESENTATION OF CREDIT FOR MANAGEMENT
CREDIT COMMITTEE

▪ Acceptability, control, adequacy, marketability and

ease of realizing security offered.
▪ Identify key risks inherent in the credit and suggest
sufficient mitigants
▪ Ascertain that loan amount, tenor and facility
structure are right.
▪ Profitability of the transaction to the bank vis-à-vis
risk assumed

236
PRESENTATION OF CREDIT FOR MANAGEMENT
CREDIT COMMITTEE
▪ CRM on the basis of its analysis would make
recommendations to the Bank’s Management
Credit Committee (MCC) for members review,
comment and approval.

237
Rounding
RoundingUp
Up

• •Any
Any contribution,
contribution, feedback
feedback or question?
or question?
Thank you

239