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Financial Management - Credit Analysis- Notes, Study notes of Financial Management

Maulana Abul Kalam Azad University of TechnologyFinancial Management

Credit Analysis - Types of bank loan, Regulation of Lending,Types of Lending,Establishing a Loan Policy,Steps in the Lending Process,Credit Analysis.

Typology: Study notes

2010/2011

Uploaded on 09/01/2011

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rajat 🇮🇳

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TYPES OF BANK LOANS
•Real estate loans: short-term loans for construction
and land development and longer-term loans for the
purchase of farmland, homes, apartments,
commercial structures, and foreign properties.
•Financial institution loans: loans to other banks,
insurance companies, finance companies, and other
financial institutions.
•Agricultural loans: loans to finance farm and ranch
operations, mainly to assist in planting and
harvesting crops and to support the feeding and care
of livestock.
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TYPES OF BANK LOANS

  • (^) Real estate loans: short-term loans for construction and land development and longer-term loans for the purchase of farmland, homes, apartments, commercial structures, and foreign properties.
  • (^) Financial institution loans: loans to other banks, insurance companies, finance companies, and other financial institutions.
  • (^) Agricultural loans : loans to finance farm and ranch operations, mainly to assist in planting and harvesting crops and to support the feeding and care of livestock.

Lending policies

creditworthiness

Regulation of Lending

  • (^) Regulations on lending limits:
    • (^) Banks cannot grant real estate loans by more than the total amount of bank's capital and surplus or 70 percent of its total time and savings deposits, whichever is greater.
    • (^) A loan to a single customer normally cannot exceed 15 percent of a national bank's capital and surplus account.

Regulation of Lending

  • (^) Regulation on Equality:
    • (^) The Community Reinvestment Act (1977) requires banks to meet the credit needs of individuals and businesses in their trade territories so that no areas of the local community are discriminated against in seeking access to bank credit.
    • (^) The Equal Credit Opportunity Act (1974) requires that no individual can be denied credit because of race, sex, religious affiliation, age, or receipt of public assistance.

Regulation of Lending

  • (^) Regulation on International Risk Exposure:
    • (^) The International Lending and Supervision Act requires indian banks to report to bank regulatory agencies and make public any credit exposures to a single country that exceed 15 percent of their primary capital or 0.75 percent of their total capital, whichever is the smaller of the two.
    • (^) This law also imposes restrictions on the fees banks may charge a troubled international borrower to restructure a loan.

Regulation of Lending

  • (^) Regulation on Bank Rating: The Uniform Financial Institutions Rating System would rate each bank by assigning a numerical rating based on the quality of its asset portfolio: - (^) 1 = strong performance. - (^) 2 = satisfactory performance. - (^) 3 = fair performance. - (^) 4 = marginal performance. - (^) 5 = unsatisfactory performance.
  • (^) The higher a bank's asset-quality rating, the less frequently it will be subject to review and examination by federal banking agencies.

Types of Lending

  • (^) A. Fund based (Current & Fixed Assets)
    • (^) 1. Overdrafts
    • (^) 2. Cash Credits
    • (^) 3. Bills Finance – Demand or Usance Bills
    • (^) 4. Demand Loans
    • (^) 5.Term Loans
    • (^) 6. Other Loans - Car Loans, Consumer Durables, Educational Loans, Housing Loans, Professionals Personal Loans, Credit Cards and so on ……

Types of lendings ...

  • (^) B. Non-Fund based (Fee based)
    • (^) Issue of Guarantees
    • (^) Issue of Letters of Credit
    • (^) Deferred Payments Guarantees
  • (^) C. Others
    • (^) Lease Finance
    • (^) Hire Purchase Finance

Policy includes

  • (^) Statements of compliance
  • (^) Authorized decision makers and persons who can make documented exceptions
  • (^) Approved forms of lending (closed end, open end, products, consumer, commercial)
  • (^) Approved underwriting procedures
  • (^) Approved forms of valuation of collateral
  • (^) Limits on rates, amount of portfolio invested in various types of loan products
  • (^) Targets for lending portfolio performance
  • (^) Usually approved by board of directors

Establishing a Loan Policy

  • (^) Important elements of a good bank loan policy as suggested by the RBI: - (^) 1. A clear mission statement for the bank's loan portfolio in terms of types, maturities, sizes, and quality of loans. - (^) 2. Specification of the lending authority given to each loan officer and loan committee (measuring the maximum amount and types of loan that each person and committee can approve and what signatures are required).

Establishing a Loan Policy

  • (^) 6. Lines of authority within the bank, detailing who is responsible for maintaining and reviewing the bank's credit files.
  • (^) 7. Guidelines for taking, evaluating, and perfecting loan collateral.
  • (^) 8. A presentation of policies and procedures for setting loan interest rates and c fees and the terms for repayment of loans.
  • (^) 9. A statement of quality standards applicable to all loans.

Establishing a Loan Policy

  • (^) 10. A statement of the preferred upper limit for total loans outstanding (i.e., the maximum ratio of total loans to total assets allowed).
  • (^) 11. A description of the bank's principal trade area, from which most loans should come.
  • (^) 12. A discussion of the preferred procedures for detecting, analyzing, and working out problem loan situations.

Steps in the Lending Process

  • (^) Site visits:
    • (^) If a business or mortgage loan is applied for, a site visit is usually made by an officer of the bank.
  • (^) 5. Credit References:
    • (^) The loan officer may contact other creditors who have previously loaned money to this customer for credit references.
  • (^) 6. Financial Statements and Documentation
  • (^) needed for Loan Evaluation, including:
    • (^) complete financial statements and,
    • (^) board of directors' resolutions authorizing the negotiation of a loan with the bank.

Steps in the Lending Process

  • (^). Credit Analysis:
    • (^) The credit analysis is aimed determining whether the customer has sufficient cash flows and backup assets to repay the loan.
  • (^) 8. Perfecting the Bank’s Claims to Collateral:
    • (^) To ensure that the bank has immediate access to the collateral or can acquire title to the property involved if the loan agreement is defaulted.
  • (^) 9. Preparing a Loan Agreement:
    • (^) Once the loan and the proposed collateral are satisfied, the note and other documents that make up a loan agreement are prepared and are signed by all parties to the agreement.