Mr Ahsan
He wants a Rs. 2,000,000 extension to his overdraft for a period of six months because he has won a lucrative contract with a large company to supply parts for one of their products. The money is required to meet additional material costs, overtime payments for labor and other costs. Mr Ahsan presents you with his cash flow projection over that period of time as well as his profit projection for the contract. You know him to be an astute businessman and so have no hesitation in granting his request.
Mrs Khan
She is looking for a loan to improve her kitchen to the standard required by environmental health so that she can prepare food for resale at home. She does not want a home improvement loan as she does not want to offer her home as security, but she can offer stocks and shares to the value of Rs. 1,000,000 as security against
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the loan of Rs. 500,000. You have confidence in her ability to make a succes of her new catering business. She seems to have the drive and ability to succeed. The conduct of her account over the past 15 years has been exemplary. Because of this, you are willing to lend her the sum asked for once the shares have been deposited with the bank and the necessary paperwork signed.
Mr-Asad
•He is relatively easy to deal withi He wants to start up a car cleaning business in a densely populated area of town which has little or no competition. He has purchased all the equipment he needs from his own resources and has a license. He has presented fairly basic financial projections, which indicate that the venture is viable and he is looking for a business credit card with a limit of Rs. 100,000 to enable him to buy petrol and materials. His father, who is already a well- respected customer of the bank, is prepared to provide an unsupported personal guarantee and Mr Asad agrees to clear the credit card balance monthly. There is little risk to the bank and you agree to assist.
Conclusion
Remember, in instances where you are approached by customers of another bank, it is important to be cautious. However, the proposal should still be assessed objectively to ensure that good business is not turned away.
The constructive "No"
It is important to remember that, when assessing proposals, you will come to the conclusion with some that you are unable to support the customer’s request. In doing this it is essential that you convey your decision to the customer as soon as possible, rather than continuing to hold out the expectation of a loan facility being made available. You need to convey your decline decision in as constructive a manner as possible.
The key issue is how you communicate this to the customer. Done properly it can sometimes strengthen your relationship with customers, demonstrating an appreciation that you have saved them from “digging a financial hole” that they would struggle to climb out of.
Equally there will be those who will steadfastly refuse to see where you are coming from, even when their accountant supports your view. In such cases, all you can do is thank them for the opportunity to support their business, pass on your regrets and recommend that they make alternative arrangements.
Approval processes for loans
All banks have their own method of having loans approved and you should become thoroughly familiar with how this is done in your own organization. Even if you are not at present an account manager
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lending money, this is a key piece of vn£ormaUcm my out genera
xmdeTsXandmg of corporate operations.
Most banks arrange for a group of customers - a portfolio of accounts ■ to be managed by a manager who may be called a Business Bankinj Manager or a Relationship Manager or an Account Manager. Thi manager will be responsible for the bank’s relationship with thei group of customers.
Lending proposals from within the portfolio will require a forma application form to be completed by the manager with a signec recommendation that the loan be granted. This proposal will normall) be passed to the account manager’s line manager for approval.
For larger loans the bank’s rules may require two managers to give approval, in addition to the account manager’s recommendation, and may also be passed to a specialist department, such as the Credit and Risk Department, for approval. The largest loan applications may be presented for approval formally to a Credit Control Committee comprising several senior managers. For lending agreed within the retail banking branch network, credit scoring is most commonly used.
Monitoring the bank's exposure to different industry sectors and to customers' credit risk
Monitoring the bank’s exposure as a whole is the job of senior executives. They must make sure that the bank's risks are well spread. This means not having too great a liability to any one industry sector, or to any one customer or group of customers. Carrying out this function is a key responsibility of senior management.
Another key responsibility of management is to ensure that the bank has adequate capital and a stable deposit base to support its lending. This involves the careful risk assessment of their asset portfolios and stability of their deposit bases, both from the markets and from businesses and individuals. Hard lessons are being learned. Some of the traditional banking principles will no longer be ignored. We have to spread and manage risk carefully and ensure that we have a stable base of capital and deposits to finance the bank’s business.
Some banks use a rating system to allocate a risk rating to each lending proposal and through this to each portfolio of accounts. This is a way of managing risk and avoiding undue concentration of low quality lending business. It also helps portfolio analysis and the pricing being achieved.
Adapted from:
Credit Lending Module and Specialized Lending Book- One of Chartered Banker Institute.
ent | Reference Book 1 Products, Operations and Risk Management | Reference Book 1 71 introduction