Yield / Return

bankers expect some rewards for the risk they undertake and the funds they spare. They also need to be remunerated for the work and expenses in taking the administering the security. Use of Financial Statement in the seven-Step Scale Approach

An essential part of the seven-step approach is the examination of the financial statement to analyze past performance of the business, and to compare its present operating results with the overall performance of the industry.

These helps banks to assess the experience and skill of the borrower, the appropriateness of the sum requested, whether the business is generating enough profit to cover repayment of the advance and return on it, suitability of the term for advance in the light of the profitability and growth of the business, the availability of assets as security, and the degree of risk involved and the ability of the management to effectively manage that risk.

The break-even analysis and the analysis of the financial statements through various ratios help achieve this objective.

Advances Documentation

Documents relating to credit can perform two functions: they can be the evidence of underlying credit transaction or they can be the security or support to ensure the full repayment of the debt. In other words, there are some documents that we necessarily should have in order to prove our claims against our clients: they are the evidence that client owes us the money. Instead there are other documents that we choose to take to ensure recovery through a “First or second way out in case that the customers is unable to pay us back.

The promissory note is however the best example of a documents taken as evidence of debt. Simply stated, promissory note is written commitment by the borrower to pay bank a sum of money sometime in the future. The mere existence of the promissory note is sufficient evident of the validity of the debt.

On the other hand, a bank guarantee or a mortgage on a property or the hypothecation of stock is not the document that proves the validity of the debt itself. We take them only when

we feel that we want to protect our exposure by having direct access to some specific assets or to the guarantor in case any thing go wrong with the original credit.

Whether they serve as evidence or security, however, credit documents have one thing in common: they embody a legal claim of the bank against the client, against certain assets, or against the guarantor. In other words the protection that we get from our credit documents based on the law. If the documents do not confirm to the law, we are just not protected.

Requirement to Meet

In order to be effective not only from the legal point of view but also for our own internal purpose, all credit documents must meet certain key requirements. For Example:

Credit documents must be appropriate for the nature of transaction involved. They must be sufficient to provide adequate coverage of the perceived risk. They must be properly executed (filled in) by duly authorized signers. They must be legally valid so that our rights will not be impaired by some formal defects. For collateral security the documents must provide for fairly straightforward access to the pledged assets.

In the case of documents on standard from blanks must be properly filled out. Documents not on standard firms should be either drawn up or reviewed by our attorney. Credit documents must be kept current. Some of them such as time promissory notes and insurance policies have a specific date for expiration or maturity.

Responsibility for the Documentation

Regardless of how you look at it, there is no way to escape the fact that the responsibility for having the unimpeachable documentation package falls squarely on the shoulders of the RM. Other departments of the banks or even legal counsel are available to help, but the RM, in the final analysis, is the person who has to be satisfied that the documentation at hands meet all the applicable requirements.

To begin with it is RM who based on his analysis of the risks involved, first determines the kind of security documents that will be required to properly protect the bank.

The RM is also the one who will physically obtain the documents from the client and who will have to go back to the client if the documents received are defective.

The RM will also have to follow up with the clients to replace expiring documents or to obtain those that were properly deferred.

The RM is also the one who has to satisfy himself that the documents are in order before sending them out for safekeeping to CAD and issuance of DAC.

It is like wise the RM who has to review the documentation physically, whenever it is required. There are at least two instances in which these physical review is mandatory: at the time of annual review and when the account is adversely classified.

Finally the RM again gets involved when the time comes to return the documents to the client, to make sure that at no time are we exposed to a break in our protection cover. Documents may be surrendered to the clients (a) To replace them with new or updated ones (b) When the credit committee agrees to reduce the security protection (c) when the facilities have been paid out in full.

The logic behind making the RM fully responsible for the documentation is quite simple. The RM’s involvement in an account does not end w\hen he gets the CP approved: from then he must see to it that the relationship is kept in good shape and free of troubles. We not only make loans, we live with them. In assuming the responsibility for the adequacy of the documentation, the relationship manager is simply observing one of the many “C’s” of credit: the control of the relationship.

To perform these duties the RM can enlist the help of other units both inside and outside the bank. For Example;

The CAD provides second look at the documents, to make doubly sure that they are indeed complete, in order, and in accordance with the approved requirements. The CAD has the obligation to refuse to issue the DAC (in effect blocking the implication of the approved facility) if the documentation is defective. In addition, the CAD is responsible for getting up a tickler system to remind the RM’s of the documents still to be obtained. The CAD also is the focal point to provide the required valuations in accordance with a schedule appropriate to a volatile type of collateral (shares).

The CAD is basically the department who permits the RM to rest on the assurance that the documents he obtained from the client are safely tucked away in the vault and available for his inspection whenever necessary.

The CREDIT COMMITTEE is also valuable source of assistance, not only because of their shared experience but also because, in certain cases the credit committee may step in if it is willing to accept the additional risk entailed by a slightly defective documents rather than going back to the client for correction.

Finally, legal counsel should be consulted in any case of doubt (In some cases, such as term loan agreements or loans to the government, referral to the attorneys is mandatory). By and large, the efficacy of the document is more a legal matter than a banking matter.