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The University of Cambodia
Tony Fernades School of Business
Group Presentation
Topic: Chapter 16
Lending Policies and Procedures:
Managing Credit Risk Group
Lectured by: Prof. Do Nara FIN302: Commercial Bank Management 8
Our team
Hak Kihong
Year IV
Bo Darayuth Un Onima
Year IV Year IV
Major: IB
Phally Ratana Prak Chanvong
Year IV Vatnak
Major: Year IV
Hospitality and
tourism
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Table of Contents
01 02
Introduction Types of Loans and
A brief information about our Regulation of Lending
presenting topic What are the regulation of
Lending?
03 04
Steps in the Lending Process Credit Analysis
How can one aquirred the Loans? What makes a good Loan?
05 06
Sources of information Parts of Typical Loan
How do we know about loan Agreement
customer? What kinds of agreements does
the bank need in order to set up a
loan?
07 08
Loan Reviews and
Conclusion
Loan Workout
Here you could describe the topic Here you could describe the topic
of the section of the section 3
Introduction
Key definitions and a little
description toward the topic
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1. Introduction
Bank lending policy and procedure
refers to the policy and guidelines
adopted by a bank to make the lending
process systematic and methodical.
Banks deal with other people’s money,
and they lend the money they borrow
J.Paul Getty, 1892-1976 from the depositors.
American industrialist, founder of Getty oil company in 1942. Unless these deposits are prudently
utilized, banks are destined to incur
losses.
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1. Introduction
What is credit risk?
There are many types of risk in financial institution.
The most important one is “Credit risk”.
In financial manner, credit risk referred to as default risk,
this is the most serious risk faced by banks or lenders.
The default of credit risk happened when the borrower
fail to make required payments.
The main prudent that we need to outlook are
mismanagement, illegal manipulation, misguided policies,
or an unexpected economic downturn.
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02. Types of loans
What Types of laons?
The Loans may be divided into seven broad categories :
1. Real estate loans
2. Financial institution loans
3. Agricultural loans
4. Commercial and industrial loans
5. Loans to Individuals
6. Miscellaneous loans
7. Financing receivables
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Regulation of Lending
• Lending institutions are among the most closely
regulated of all financial service institution.
• The quality of a loan portfolio and the
soundness of its policies are the areas federal .
The Examiner assigns one of these ratings:
Strong performance
Satisfactory performance
Fair performance
Marginal performance
Unsatisfactory performance 8
03. Steps in the Lending Process
1. Finding Prospective Loan 2. Evaluating a Prospective Customer’s
Customers Character and Sincerity of Purpose
Once a customer decides to request a loan, an interview with
Most loans to individuals arise from a direct
a loan officer usually follows, giving the customer the
request from a customer who approaches a
opportunity to explain his or her credit needs.
member of the lender’s staff and asks to fill out
a loan application.
3. Making Site Visits and Evaluating a Prospective Customer’s Credit Record
If a business or mortgage loan is applied for, a loan officer often makes a site visit to assess
the customer’s location and the condition of the property and to ask clarifying questions.
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4. Evaluating a Prospective Customer’s 5. Assessing Possible Loan Collateral
Financial Condition and Signing the Loan Agreement
If all is favorable to this point, the customer If the loan committee approves the
is asked to submit several crucial customer’s request, the loan officer or the
documents the lender needs in order credit committee will usually check on the
to fully evaluate the loan request, property or other assets to be pledged as
including complete financial collateral in order to ensure the lending
statements and, in the case of a institution has immediate access to the
corporation, board of directors’ collateral or can acquire title to the
resolutions authorizing the negotiation property involved if the loan agreement is
of a loan with the lender. defaulted.
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6. Monitoring Compliance with the Loan Agreement
and Other Customer Service Needs
Is this the end of the process? Can the loan officer
put the signed loan agreement on the
shelf and forget about it? Hardly! The new
agreement must be monitored continuously
to ensure the terms of the loan are being followed
and all required payments of principal
and interest are being made as promised.
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04. Credit Analysis
What make a good laon?
The Three major of question regarding each loan
application
1. Is the borrower creditworthy? How do you
know?
2. Can the loan agreement `be properly structured
and documented?
3. Can the Leader perfect it’s claim against the
borrower’s earnings and any assets that may be
pledged as collateral?
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1. Is the borrower creditworthy?
How do you know?
6 Basic of Cs of Lending
1. Character
2. Capacity
3. Cash
4. Collateral
5. Conditions
6. Control
2. Can the loan agreement `be properly
structured and documented?
The Loan Officer is responsible not only to the borrowing
customers but also to the depositor or other creditor as
well as the stockholder and must seek to satisfy the
demands of all
The Borrower must be able to comfortably handle any
required Loan payment be the lender’s success depend
on fundamentally on the success of it’s borrowing
customer
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1. Can the Leader perfect it’s claim against the borrower’s
earnings and any assets that may be pledged as collateral?
Account Receivable Inventor
Factoring Real Property and
personal Property
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05. Sources of Information
A lender often relies heavily on outside information to assess the character, financial
position, and collateral of a loan customer The lending institution may contact other
lenders to determine their experience with the borrowing customer. Were all
scheduled payments in previous loan agreements made on time? Were deposit
balances kept at adequate levels? In the case of a household borrower one or more
credit bureaus will be contacted to ascertain the customer’s credit history. How much
was borrowed previously and how well were those earlier loans handled? Is there any
evidence of slow or delinquent payments? Has the customer ever declared
bankruptcy?
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Parts of Typical Loan
Agreement
Lets explore all the parts of
loan agreement together!
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6. Parts of Typical
Loan Agreement
How is Loan Agreement defined?
Loan agreement is a document, signed by
both the lender and the borrower, that
spells out the terms of the loan.
There are many types of loan agreement
and they are vary tremendously from
industry to industry, country to country.
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The Promissory Loan Commitment Collateral
Note Agreement
Allows a lender to take
ownership of the proper that
A written promise to pay at a An agreement by a commercial
was used as collateral and sell it
fixed or determinable future bank or othe finanacial
to recover at least a portion of
time a sum of money to a institution to lend a business or
what the borrower was loaned.
specififed individual or to bearer. individual a specified sum of
money.
Covenants Borrower Guaranties Events of Default
or Warranties
This is by far the most formal This final one is a predefined
loan agreements. This type of circumstance that allows a
agreement contain “restrictive In loan agreements, the
lender to demand full repayment
covenants”. guarantees or warranties here
of an outstanding balance before
refers to the information
it is due.
supplied in the loan application is
Affirmative Negative true and correct.
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07
Loan Reviews and
Loan Workout
How the loan is being reviewed?
How can loan workout help recover
fund from problem loan situation?
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I. Loan reviews
Why do we/banks need loan reviews?
Financial institutions conduct loan reviews to uncover vulnerabilities in
their loan portfolios. Proactively identifying and correcting such
weaknesses helps to ensure adherence to applicable regulations while also
mitigating risk. At this point the reviewers will check the completeness of
loan documentation and/or evaluate loan performance.
Typically, a loan review is conducted on commercial loan files, either
internally by bank staff or by hired third-party auditors.
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Important principles of loan review process
Credit history
1 2 Cash flow history and
projections for the business
Collateral available to
secure the loan
3 4 Character
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Key factors that
indicate a bad
loan agreement
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Additional information that also need to be
consider in loan reviews
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Loan workout
• Loan workout – the process of recovering funds from a problem
loan situation
• Warning Signs of Problem Loans
1. Unusual or unexpected delays in receiving financial statements
2. Any sudden changes in accounting methods
3. Restructuring debt or eliminating dividend payments or changes in
credit rating
4. Adverse changes in the price of stock
5. Losses in one or more years
6. Adverse changes in capital structure
7. Deviations in actual sales from projections
8. Unexpected or unexplained changes in deposits
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Loan workout (cont.)
• What steps should a lender take when a loan is in trouble?
1. Do not forget the goal: Maximize full recovery of funds
2. Rapid detection and reporting of problems is essential
3. Loan workout should be separate from lending function
4. Should consult with customer quickly regarding possible options
5. Estimate resources available to collect on loan
6. Conduct tax and litigation search
7. Evaluate quality and competence of management
8. Consider all reasonable alternatives
▫ Preferred option: Seek a revised loan agreement
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8. Conclusion
1 3 5
Making Lending is The risk Risk can be Recovery
loans also risky of loss controlled of funds
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This chapter has focused on lending policies and procedures and the many different types of loans lenders
offer their customers. It makes theses key points above
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