Bank Management

PGDM
IMT
June – July 2018
Praloy Majumder
1
Loans and Advances

2
 Loans and Advances

Loan Division

Wholesale Retail

Other than Other than

Corporate Corporate
corporate Corporate

3
Fund Raising options for
company
Security Issued

Debt Equity

Domestic Foreign

Working Capital

Loan Product

Money Market Instrument

FX Product

Term Loan

4
 Loans and Advances

Loan Division

Working Capital Term Loan

Long Term Asset,

Current Asset
Current Asset
5
 Loans and Advances

Loan Division

Working Capital

Fund Based Non Fund Based

6
 Credit Risk Framework
• Credit functions is one of the most
important functions of Financial
Intermediary
• Granting credit means taking an
acceptable risks
• Granting credit also means proper
pricing of risks
• Credit Risk Framework is the objective
way of arriving these two objectives
 Credit Risk Framework

Credit Risk
Framework

Credit
Credit
Credit Policy Granting
Strategy
Process
 Credit Policy
• Financial Intermediary would decide
the broad outline of the medium term
credit guidelines of the organization
and the same would be incorporated in
the Credit Policy guidelines
• Credit policy would try to achieve this
by stipulating the guidelines in this
regard and also in conformation with
regulatory guidelines
 Credit Policy
• Sanctioning process
– Delegation of financial power
– Time to complete the process
– In consistent with the company’s customer
service contract
• Focused area :
– Products
• Secured
• Unsecured
 Credit Policy
• Product :
– Working capital
– Term Loan
– General Purpose Corporate Loan
• Industry :
– Focused industry
– Negative industry
– Neutral industry
 Credit Policy
• Company exposure :
– Regulatory Norm
– Financial Intermediary Norm
• Group exposure :
– Regulatory Norm
– Financial Intermediary Norm
• Tenure of Loan :
– Asset Liability Mismatch keeping in mind
 Credit Policy
• Assessment process :
– Working capital
• Sole banking
• Multiple banking
– Methods of working capital assessment
– Term Loan
– Margin Money stipulation
– Process of assessment of Term Loan
 Credit Policy
• Security aspect :
– Normal securities
– Specification of additional securities
– Valuation norms
• Procedure to be followed for security
creation and for multiple banking
lending arrangement
 Credit Granting Process
• Sourcing of the loan
– Direct
– Out sourced
• First preparation of application by :
– Relationship
– Credit person
• Credit Underwriting process :
– Personal Discussion
 Credit Granting Process
• Credit underwriting process
– Appraisal format
– Writing quality
• Risk vetting
– Risk rating
– Observation of risks
• Putting the proposal to the committee
• Committee’s decision
 Credit Administration
• The function is between sanction and
disbursement
• Issuance of sanction letter and
completion of documentation
• Fulfillment of terms and condition as
per the sanction letter
• Finding out deviation and taking
approval for deviation
 Credit Administration
• Documentation standardisation
• Special documentation requirement for
special type of securities
• Standardised Operating Procedure for
documentation and fulfillment of pre
disbursement conditions
 Credit Control
• Monitoring of Credit
– Portfolio level
– Individual level
• Monitoring policy of different loans
• Monitoring report of different loans
• Reporting policy of monitoring reports
of different accounts as well as portfolio
level
 Credit Policy
• Constituents :
– Credit Growth
– Macro Economic growth and credit growth
of the company and its relationship
– Tracking the actual credit growth versus
the projected growth
– Sector wise credit growth target
– Actual sector wise credit growth
 Credit Policy
• Constituents :
– Process of acquiring new customers versus
the credit policy targets
– Process of selection of customers as
mentioned in the credit policy
– Actual process of selection of customers as
mentioned in the credit policy
Customer selection criteria

Customer

Non
Retail
Retail
Process of credit appraisal

Step 1 Qualitative
Check
8 Point Criteria

Step 2
Authentication
of Financial Checking Test
Statement

Step 3
Present Financial
Financial Statement
Position Analysis
Process of credit appraisal

Step 4
Understanding
Short term or
the
long term
requirement

Step 5 Assessment
process
WC & TL

Step 6 Monitoring
Renewal or
Exit
Selection of 8 point criteria
Authentication of financial
statement checking
Authentication of financial
statement checking
 Manipulation of Financial
Statement
• Problem with the third world economy
:
– India
– Bangladesh
– Srilanka
– Nepal
– Vietnam
• Actually incurring losses but showing
profit
Manipulation of accounts :
Principle

Manipulation

P&L Balance Sheet

Manipulation : Principle

P&L

Inflated Increased
Income Expenses
Manipulation : Principle

P&L

Inflated Reduced
Income Expenses
Manipulation : Principle

B/S

Reduced Debt
Inflated Asset and Increased
Net worth
Manipulation : Principle

Inflated Asset

Overvaluation Capitalisation
of Inventory of Expenses
Ratio Analysis & Credit Appraisal

34
 Types of Ratios

Types of
Ratio

Liquidity /
Profitability
Leverage Return Ratio
Ratios
Ratios

35
 Profitability Ratio

Profitability
Ratio

Interest Coverage
PAT/Sales EBIDTA/Sales
Ratio

36
 PAT/Sales Analysis
High
High Realisation

Low
Sales
High
Low High
Realisation
PAT/ Low
Sales Low High High
Realisation
Low
Sales
Low
High
Realisation
Low

37
 EBITDA/Sales
• Same grid with PAT/Sales analysis
• Find out the following component in
percentage terms of the total numbers :
– Depreciation
– Amortisation
– Interest
– Tax

38
 Interest Coverage Ratio
• Same grid like PAT/Sales
• However, PAT is accrual .
• Proper adjustment towards the realisation should be made
before drawing any conclusion
• The interest commitment to be segregated into :
– Secured Loan Interest
• Short Term
• Long Term
– Unsecured Loan Interest
• Short Term
• Long Term
• The proportionate coverage ratio should be factored in.

39
 Leverage Ratio
High CR
High
ST Low
CR
USL
Low High
High
CR
LT Low
High
CR
High

TOL/
TNW
High
ST CR
Low
SL
High
CR
Low High
USL = Unsecured Loan
SL= Secured Loan LT CR
ST= Short Term Low
LT= Long Term
CR= Cash Realisation
CR 40
 Leverage Ratio
High CR
High
ST Low
CR
USL
Low High
High
CR
LT Low
Low
CR
High

TOL/
TNW
High
ST CR
Low
SL
High
CR
Low High
USL = Unsecured Loan
SL= Secured Loan LT CR
ST= Short Term Low
LT= Long Term
CR= Cash Realisation
CR 41
 Debt/Equity Ratio
High CR
High
ST Low
CR
USL
Low High
High
CR
LT Low
Low
CR
High

Debt/
TNW
High
ST CR
Low
SL
High
CR
Low High
USL = Unsecured Loan
SL= Secured Loan LT CR
ST= Short Term Low
LT= Long Term
CR= Cash Realisation
CR 42
 Debt/Equity Ratio
High CR
High
ST Low
CR
USL
Low High
High
CR
LT Low
High
CR
High

Debt/
TNW
High
ST CR
Low
SL
High
CR
Low High
USL = Unsecured Loan
SL= Secured Loan LT CR
ST= Short Term Low
LT= Long Term
CR= Cash Realisation
CR 43
 Current Ratio

HL
High

CA Low

High HL

CR
High
HL
CL
Low

CR= Current Ratio

CA= Current Asset HL
CL= Current Liability
HL= Holding Level
44
 Current Ratio

HL
High

CA Low

Low HL

CR
High
HL
CL
Low

CR= Current Ratio

CA= Current Asset HL
CL= Current Liability
HL= Holding Level
45
 Return Ratio
• Return on Capital Employed
• Return On Equity
• Return On Asset
• Return on Asset would be more
important from debt lenders point of
view
– Specially from SME perspective
• Once ROA is determined then it has to
be compared with the leverage ratio
and funds available for repayment of
the debt part 46
Working Capital Loan

47
 Production

Borrowing

Repayment Sales

Realisation 48