FAM Assignment

CASE 1.

The following factors should be taken into account before any bank sanctions the loan to
the applicant:

1. The financial and economic information of the applicant is defined as financial

creditworthiness pre requirements. This includes information about the ability of the
applicant to pay the loan back within the time frame provided. This may be analysed
by the industry that the applicant plays role into, its trends and how it may behave in
future.

2. In order to get safeguarded from any mishappenings in future the bank should
perform a check about the creditworthiness of the applicant.

3. The bank requires all documents and data related to the borrower's accountability.
Thus creditworthiness depends on several major factors: the borrower's efficiency,
to repay his loan, his profit making ability, the value of his assets, the state of the
economic situation, his profitability, etc.

4. The bank account information and it transaction reports may give valuable insights
about the financial condition of the applicant.

5. Borrower's liquidity indicators are also considered when taking a decision to extend
a loan.

6. Specific Purpose of Loan and Intent to repay loan.

7. Customer Has Legal Authority to Sign Binding Contract.

8. Personal creditworthiness prerequisites which are the ability to make an estimate

when comparing incomes and expenditures for the corresponding business activity,
the ability of management to stimulate for higher achievements and to implement
effective management, profound knowledge of the industry and the market and the
specific risks involved in this activity, sufficient experience in solving financial issues
and in managing credit resources.

The bank should take the following steps:

1. Bank should ask for the balance sheets of the firm.

2. Also it is important to analyze profit and loss statement.
 3. Statement of liability on previous credits and their servicing, statement of changes in
equity.
4. Statement of cash flow that Arther is providing along with the application.
5. If the Profit After Tax (PAT) is found to be on an increasing trend for the firm, the
bank can accept the loan application.
6. Since Arthur has a long standing experience of the industry bank can count on his
ability to carry out profitable activities.
7. However, the bank should analyze the solvency of the firm.If the long term debt of
the firm is not exceeding the equity share capital which if exceeds would mean that
the firm is relying more on the external debt rather than internal sources of funds.
8. Bank can ask for some kind of collateral security. This can be one of the following
mentioned items:
a. Accounts Receivable
b. Factoring
c. Inventory
d. Real Property
e. Personal Property
f. Personal Guarantees

Only after analysing all the above checks the bank should go ahead with the application.

CASE 2

Problems confronting Sterling company.

 Business is restricted to recreational cars, a luxury product.

 Unhealthy economic conditions.
 Increase in fuel prices leading to reluctance in customers to buy recreational cars.
 Threat of unavailability of fuel in future leading to customer’s hesitation in investing
on the luxury item.
 High interest rates on money borrowed to purchase cars
 Problem of overcrowding camp grounds have also kept many customers from
making heavy investment in the product.

These problems can be resolved by making analysis of the general economic situation in the
country. Since the product in which the company is dealing is a luxury item it is very
important to forecast the trend of the purchasing behaviour in near future, particularly the
next year. These analyses can be done by studying the micro economic factors which are
involved in working of the company.

Steps to be followed:
The analyses should begin with the past trends recorded by the company. We have to
calculate current ratio (liquidity ratio) and solvency ratio of the firm. These will require
current assets and liabilities, debtors and capital equity

 If the current ratio is at least 2, then the company will be said to be in a sound short
term liquidity position, but if the current ratio is less than 2, then this would mean that
the company might face some problems in paying off the regular instalment for the
loan.

 If the liquid ratio is greater than or equal to 1, then it would mean that the company has
sufficient liquid cash and cash equivalents to pay off the immediate current liabilities
and hence, it will be in a position to pay the regular interest liability.

 In case of solvency ratios, the most prominent one is Debt-Equity Ratio. If Debt-Equity
Ratio is more than 1, then it means that the company is relying more on the external
debt. Granting a loan at this stage would mean increase in the long term debt of the
firm, but if the company is relying more on its internal sources of funds, then it would
be in a better position to take a loan and pay back its liabilities on time.