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Lending Operation's & Risk Management 1
LENDING OPERATIONS &
RISK MANAGEMENT
AREA-4
FINANCIAL RISK ASSESSMENT
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Finance facilities required by customer
types and sources of risk therein:
Large manufacturing/processing units
Small and medium scale manufacturing/
processing units Commodity traders
Construction and supply contractors
Service organizations
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Understanding customers business
nature, size, and inherent risks:
Nature processing/manufacturing, wholesaling/trading, retailing
Sourcing of goods dealt with origin, brands,
makes, product lines Physical and sale/distribution arrangements for
conducting business
Customers competitive position strengths and
weaknesses Terms of payment to suppliers and buyers gap
in trading cycle that needs financing
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Transactions to be financedidentification
and capturing repayment sources
Transaction mechanics and risk stages reliabilityfor timely completion of transaction
Terms of payment to suppliers and buyers
determining financing gap Primary & secondary sources of repayment,
amount, reliability and methods for capturing
Quantification of net bank risk
Collateral requirements quantification anddetermining collateral type and mix
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Assessing customer Integrity and
capabilitymarket sources:
Tapping market intelligence reliability of sources
Bank references and their deficiencies
Informal bank inquiries
Visit to customers premises the things toobserve
Customer interview and Visit Report
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IMPORTANCE OF CREDIT RISK RATING
The Risk Rating System is a tool, which provides a uniform
framework and common language for assessing and monitoringrisk in a credit portfolio.
Credit Risk Rating (CRR) is intended to reflect the overall riskprofile of the borrower or guarantor. Determined throughexamining the following guidelines:
a. Country Factorsb. Industry / Company Stability / Regulatory Environmentc. Competitive Positiond. Operating Performancee. Cash Flow Strengthf. Balance Sheet Strengthg. Management and controlsh. Debt Ratings / Credit Ratings (if available)i. Collateral Quality and Control
j. Adherence to credit terms and documentationk. Company and Owner relations
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Country Factors are evaluated by the following
factors, which are prevalent in the country /economy: Political Stability
Economic Structure (per capita income; private sectordevelopment; strength of private sector; pace of economic
development) Macro Economic Stability (fiscal and monetary policy;
inflation and current account deficit)
Debt Burden (extent of foreign debt; quantum of FXreserves)
All borrowing customers must be credit risk rated. Acustomers credit risk rating must be re-assessedimmediately if any deterioration in credit worthinessbecomes evident.
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The purpose of this review is to:
Agree to an appropriate risk rating for the
customer;
Develop or commence development of an
appropriate strategy and action plan with specifictarget outcomes and target dates.
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RISK RATING BENCHMARKS
Risk Profile Range Risk Rating(%)91-100 181-90 271-80 361-70 451-60 545-50 641-44 735-40 825-34 9upto 25 10
Minimum risk acceptable level of determining eligibility forfinancing is risk rating score of 61%
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RISK RATING V/S CLASSIFICATION
Risk Rating Category of Classification
1-4 Current
5 Watch list
6-7 Special Mention/OAEM
8 Substandard
9 Doubtful
10 Loss
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SPONSORS / MANAGEMENT
Sponsors Reputability
Sponsors reputability is of paramount importance at the
time of sanctioning any credit exposure to the borrower. What needs to be determined is the sponsors past
repayment record and meeting their financialobligation/commitments with all lenders / financialinstitutions.
Particular emphasis should also be given to repaymenttrack record of group and associate concerns and parentcompany, as the case may be.
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Sponsors Experience Sponsors Experience plays a vital role in guiding.
the affairs and setting long-term objectives of thecompany.
Questions that needs to be answered
1. Since when have the sponsors been in business?2. Experience in other related industry?
3. Market creditability of the sponsors/directors?
Maximum point may be allocated, wheresponsor have rich past industrial experience of
at least 25 years. (Sources: Form-29,Certificate of incorporation etc should bereferred to validate this information.).
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Sponsors Qualification
Sponsors Qualification indicates the technical qualificationand professional/ academic background.
System and Procedures
System and procedures highlights what managerial andoperational procedures and processes and jobs have beenwell defined, documented and communicated down-the-lineand across-the-board.
Has the borrower established standard operating
procedures (SOPs), developed standard MIS, other controlsystems, obtained international accreditation e.g. ISOcertifications and procedures & responsibilities theretounderstood by the employees.
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Sponsors Succession Planning Sponsors succession planning are the sponsors
equipped and have planned development ofsecond line of management and professionals,and hierarchical mapping and planning is in place.
Managements Experience Managements Experience deals with the ability
and background of the senior Management, theirqualification and experience in managing day-to-
day affairs of such concerns. Highest weightageto be given where management has vast in-depthknowledge/expertise.
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Managements Reputability
Managements Reputability measures the past
record/creditability of the individual(s) in themarket/industry and their handling to perviousassignments.
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SECURITY / COLLATERAL
Prudential Regulations for Corporate/Commercial Banking)
It is vitally important to thebanks credit quality to
have and to maintain separate transactiondocuments, which are complete, correct and
properly executed. Failure to obtain and maintain
documentation may prevent the bank from
enforcing its rights against a borrower and everyprecaution must be taken to prevent such
situations.
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Realizability
Realizability of the security is to ascertain the
force-sale value of the securities under the bankspossession and its ease of conversation into cashunder default scenario. Also to be analyzed is themarketability and acceptance of the particular
asset incase of need for disposal /sale of asset?
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Charge Ranking and Sharing Charge Ranking and Sharing determine thebanks seniority of the charge and incase whereparri-passu charge is acquired, all NOCs ofexisting charge holders have been acquired andconsent secured.
Collateral (Debt/Asset) Coverage
Collateral (Debt/Asset) Coverage (Additionalmargin on security - strict compliance to theMinimum Prescribed Margin SBP PrudentialRegulations R-13 specifying Margin Requirement
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Documentation and transaction/borrowers
related information Documentation and transaction / borrowers
related information obtained by the bank at thetime of sanctioning of limit/credit
All security/supporting documents and materialrelated information/valuations and borrowersdetails have been obtained, as per approvals and
transaction specifications, and requirements ofprudential regulations
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