Lending is the Co Activity of all Banks which leads to profits if done prudently….

For prudent lending we follow numerous guidelines which we propose to discuss now…………..

Mnemonics

We use several mnemonics to guide us through principals of

Good Lending

 

 

5 C’s

Character

Capacity

Repayment Capacity

Capacity to borrow

Capacity to carry out business

Capital

Debt to equity Ratio

Conditions

Internal

External

Collateral

 

 

CAMPARI

Character

Ability

Margin

Purpose

Amount

Repayment

Insurance/Security

 

PARTS

Purpose of the facility.

Amount of the loan/Customer’s stake.

Repayment- Ability to repay.

Term of the facility.

Security.

 

 

Now we will go through PARTS

 

 

PURPOSE

 

Should be legal.
Should be profit generating (Excluding personal borrowers).
Should not put the Bank at risk.
Should be within the credit guidelines of the Bank.
 

 

NOTES…

For fixed assets

Generate sufficient profits to repay the loan.

To repay another Borrowing/Creditor

Inquire as to why the client could not pay earlier. He may request for a take over of facilities for better benefits offered by the new bank. (Better package of facilities/better interest rates etc.)

Working capital

In proper lending, increase working capital should constitute an increase in stocks.

New ventures

The funds should be properly utilized to set up a profit generating business.

Personal Requirements

Purchase of consumer durables, purchase of a vehicle, education, travel, etc. (To be repaid out of the client’s regular income.)

 

Facilities which should be turned down

Illegal purposes.

Why….?

Criminal prosecution.

Inability to repay when the illegal activity is brought to a halt

Unauthorized Buildings.

Building a house or extension without proper approvals.

Speculative Purposes.

Should be discouraged. If how ever you choose to lend – margin of safety.

E.g.: Shark fin/Sea cucumber.

 

Purposes which are out side the credit policy of the Bank

 

AMOUNT

 

Principals.

It is not for the bank to suggest how much the bank would be willing to lend the customer.

Should not be more or less than what is required.

Customer’s own financial stake compared to the borrowing.

 

If short funded

The bank may be compelled to advance against again. (TOD etc).

Client may borrow from an outside.

Project may halt.

If over funded…

Unnecessary interest cost.

Funds may be used utilized for other activities such as unwanted capital expenditure.

 

 

Notes….

Request for capital investment to purchase machinery. You may have to think about increased working capital to utilize the maximum production capacity.

 

Housing... Think about increase of cost of building materials, legal fees, and Stamp duty.

 

Importing of machinery…  Think about Duty / Installation charges.

 

 

Customer’s own stake….

He is more likely to put a greater effort to ensure that the venture succeeds.

Client is expected to put at lease 25% of the project cost.

(For business clients). Ideally bank to put less than the customer’s own stake.

Personal customers rely on their salary to repay the loans and can finance a greater % of the requirement.

 

 

Golden Rule

“The customer should contribute enough to ensure that the bank’s stake is not put at risk”

 

 

REPAYMENT

Personal…….. Regular Income.

Business…….. Profits / Cash flows.

 

Calculate Repayment.

Loan……….. Capital & Interest.

Overdraft…. Interest & gradually reduce the size of the overdraft.

Repayment Capacity… What to look for

Bank statements

Profit & Loss A/C

Cash flow statements

Past records.

 

TERM

 

Term should be acceptable to the bank.

Housing    20 – 25 years.

Project Loans   5 – 7 years.

Trading    1 – 3 years.

Personal    3 – 5 years.

 

 

20 year Housing loan too long for a 50 year old customer.

5 year vehicle loan is too long for a second hand car.

Computer loan for 3 years may be too long.

SECURITY

Only the second source of repayment.

It is a fall back situation.

Should not rely on the security when lending.

 

 

CHARACTER

The type of person the borrower is…………..

Honest / Reliable / Person of integrity

 

Look for………………………

Past records.

Personal interview (open & straight forward).

Business knowledge.

Experience.

Management & financial skills.

Conduct of business affairs.

Hard working.

 

CONNECTIONS

A well known or connected person.

Banker might agree for an advance on the strength of such connections when in normal circumstances it would be declined.

This is done to either create a good will either with an important / potential customer or at least to avoid bad will.

 

 

The Consequence of Not Lending

Flat refusal to lend money will create a Bad Will.

In general it is a bad commercial practice to upset customers, because even if a lending proposal is turned down the customer might still provide valuable business to the bank.

Therefore the Banker must decline customer’s request with great tack & politeness.

The reason for declining should be properly   explained. If appropriate the banker should explain to the customer, what he should do before the bank reconsider the decision

By

Sanjeeva Pieris