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CALM4e Slides Ch01

This document outlines the key topics covered in Chapter 1 of a banking credit management course, which include the basic principles of lending like safety, suitability, and profitability. It discusses the framework for credit decisions, the lending process, types of bank advances and borrowers, and how to structure advances and design an overall advances portfolio. The importance of credit culture is also covered.

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Ra'fat Jallad
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156 views

CALM4e Slides Ch01

This document outlines the key topics covered in Chapter 1 of a banking credit management course, which include the basic principles of lending like safety, suitability, and profitability. It discusses the framework for credit decisions, the lending process, types of bank advances and borrowers, and how to structure advances and design an overall advances portfolio. The importance of credit culture is also covered.

Uploaded by

Ra'fat Jallad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Bank Credit Management Course

Dr. Ra’fat Jallad


First Semester (20-21)
Chapter 1
The Principles of Lending and Lending Basics
Learning Objectives
• Identify the basic principles governing bank lending and explain their
importance.
• Understand the framework within which credit and lending decisions are
taken.
• Understand the lending process.
• Explain the characteristics of various types of bank advance.
• Distinguish different types of borrowers and any special considerations in
lending.

Chapter 1 Credit Analysis and Lending Management


Learning Objectives
• Explain how advances are structured.
• Explain the importance of credit culture in a lending institution.
• Understand how an advances portfolio is designed.

Chapter 1 Credit Analysis and Lending Management


Introduction
• Lending evolved in real-world practice with supporting principles developed
later.

• Lending principles are universal in their application to loans of all sizes.

• Lending is both an art and a science

Chapter 1 Credit Analysis and Lending Management


Principles of Good Lending
Principles of Good Lending
• Safety of Loan:
– Borrower should be of good character, financially sound with the ability and willingness
to repay the loan.

– The Lender should account for meeting unexpected emergencies.

– Back up in the form of collateral security. Collateral serves as a safety valve or insurance
against unforeseen developments.

Chapter 1 Credit Analysis and Lending Management


Principles of Good Lending
• Suitability of Loan Purpose:
– Loan applications may be accepted or rejected subject to bank policy, legality and
ethical principles (valid purpose).

• Profitability:
– The risks and returns from lending activities must be carefully considered to improve
viability of loan portfolio.
Following the Lending Principles: Credit
analysis
• Regardless of loan size, lending principles of varying levels of sophistication
must be rigorously adhered to.
• Traditional Methods of Credit Analysis — the “Five Cs”:
– Character
– Capacity
– Capital
– Collateral
– Conditions

Chapter 1 Credit Analysis and Lending Management


• Modern Approaches to Credit Risk Measurement:
– Econometric techniques
– Optimisation models
– Neural networks
– Hybrid systems

Chapter 1 Credit Analysis and Lending Management


A Framework For Credit and Lending
Decisions
• External Factors Affecting Lending Decisions:
– Legislation including common law, RBA Act, Banking Act, Uniform Consumer Credit
Code, ASIC Act and the ACCCs consumer laws
– Macroeconomic factors
– Industry-specific factors

• Lending Institution-Specific Factors:


– Institution's lending policy, Loan Budget and Staff Availability

• Borrower-Specific Factors:
– Meeting “Five Cs” requirements and compliance with legal requirements such as
common and ‘black-letter’ law

Chapter 1 Credit Analysis and Lending Management


The Lending Process
• Ten-Step Process:
– Step 1: Use of prescribed application form
– Step 2: Obtain required supporting documents such as income and/or financial statements
– Step 3: Check loan application and supporting documents for inconsistencies
– Step 4: If personal loan, loan decision can be made. If business loan, lender to gain better
knowledge of proposed borrower’s business
– Step 5: Appraise technical, commercial, financial and managerial aspects of the business
– Step 6: Assess financial requirements and determine most suitable product

Chapter 1 Credit Analysis and Lending Management


– Step 7: Advise potential borrower whether loan application is successful or not
– Step 8: Ensure security and all other loan documents are signed
– Step 9: Monitor borrower’s financial position and repayment position
– Step 10: Ensure necessary steps are taken before loan in default.

Chapter 1 Credit Analysis and Lending Management


Characteristics of Different Types of
Advance
• Traditional Types of Advance
– Loans Classified According to:
– Security — secured v. unsecured loans
– Type of Borrower — personal, business or government
– Term of Loan — short, medium or long
– Sector — retail, manufacturing or mining

• Traditional Types of Advance


– Loans Classified According to:
– Region — rural, town or major city
– Purpose — personal, home, commercial, motor vehicles.
– Overdrafts:
– Flexible form of fixed limit continuous loan with no fixed repayment schedule and flexible
drawdown characteristics.

Chapter 1 Credit Analysis and Lending Management


• Modern Forms of Advance for Business:
– Equity Participation: where equity rather than debt finance is provided
– Loan Syndication: consortium of lenders provide funding
– Equipment Leasing: financing v. operating
– Factoring: sale of business’ debt

Chapter 1 Credit Analysis and Lending Management


Different Types of Borrower
• Personal:
– Unable to enter loan contract if:
– Minors — borrower under 18 years
– Persons of unsound mind
– Insolvents — bankrupts or insolvents who are either undischarged or
pending proceedings
– Joint Accounts: account held in the name of two or more persons
– Husband and Wife: see joint account

Chapter 1 Credit Analysis and Lending Management


• Business Borrowers:
– Sole Proprietorship: Business operated by one person
– Partnerships: Business with more than one owner where profits shared
– Companies: Separate legal entity recognised under Corporation Law
• Special Types of Borrower:
– Local authorities: e.g. local government entities such as City Councils
– Clubs, Literary Societies and Schools: Generally registered as
unincorporated associations or trusts
– Unincorporated Associations: e.g. arts, charities and religious
organisations
– Co-operatives: e.g. farming bodies

Chapter 1 Credit Analysis and Lending Management


• Special Types of Borrower:
– Local authorities: e.g. local government entities such as City
Councils
– Clubs, Literary Societies and Schools: Generally registered as
unincorporated associations or trusts
– Unincorporated Associations: e.g. arts, charities and religious
organisations
– Co-operatives: e.g. farming bodies

Chapter 1 Credit Analysis and Lending Management


Structuring of Advances
• Security/Collateral:
– Includes land, buildings, directors’ guarantees, shares and crop liens

• Debt Covenants:
– Outlines key loan conditions including fees, security, repayments

• Pricing Issues:
– Risk premium over a benchmark rate

Chapter 1 Credit Analysis and Lending Management


Credit Culture
• Can be defined as:
– The institutional priorities, traditions and philosophies that surround credit or lending
decisions; and/or
– “The collection of principles, actions, deterrents and rewards that exist within a lending
organisation” Caouette, Altman and Narayanan (1998)

Chapter 1 Credit Analysis and Lending Management


Designing an Advances Portfolio
• Advances portfolio design requires decisions incorporating:
– What resources are available to invest?
– Of these, what proportion should be invested in advances?
– What proportions should be invested in personal versus business advances?
– Of those personal advances, what proportion should be in housing loans, credit cards and so
on?

• Three main approaches:


– Historical or recent loss experience
– Standards based on risk tolerance to capital
– Risk-adjusted return on capital, where risk is evaluated relative to the risk either at the
transaction level or business unit level.

Chapter 1 Credit Analysis and Lending Management


Summary
• basic principles governing bank lending
• framework within which credit and lending decisions are made
• various steps involved in the lending process
• characteristics of various types of bank advance
• different types of borrower
• Structuring loans and advances
• importance of credit culture
• designing loans and advances portfolios

Chapter 1 Credit Analysis and Lending Management

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