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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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lending operations 7

Documents