Financial Risk Assessment Quiz

Managing Bank Credit Portfolio

• Loan monitoring and account management commence after loan disbursement, stage 4 of the credit process cycle.
• Loan monitoring is part of account relationship management, identifying business opportunities and potential risks. Early warning signals may require bank intervention.
• Portfolio management and loan monitoring involve:
  • Monitoring banking facility utilization and borrower account conduct.
  • Assessing borrower financial performance, reviewing financial statements, and conducting site visits.
  • Reviewing industry and market developments impacting borrower viability.

Loan Account Management

• Annual account reviews are integral to account management, involving historical financials and forecasts to evaluate future cash flow and debt servicing ability.
• Other review areas include:
  • Compliance with lending covenants.
  • Industry outlook where borrower operates.
  • Facility structure appropriateness.
  • Adequacy of existing security arrangements.
  • Validity and enforceability of security documentation.
• Non-compliance with lending covenants indicates management incompetence and poor corporate governance. Gearing and dividend ratios are common covenants ensuring shareholder commitment and cash flow for loan repayment.
• Breaches can signify inadequate shareholder commitment, risk of insolvency or poor cash management.

Loan Monitoring

• Loan monitoring identifies business opportunities, and early warning signals requiring bank intervention.
• Early detection of warning signals allows lenders to take corrective action before total credit default occurs.
• Loan classification:
  • Watch List: for loans showing weaknesses, with potential for downgrade to impaired within 12 months.
  • Special Mention: for loans defaulted, but not yet classified as impaired.

Scope of Portfolio Management and Loan Monitoring

• Monitoring utilization of banking facilities.
• Reviewing borrower's financial statements and forecast.
• Conducting site visitation to borrower's premises.
• Monitoring external industry/market development, and external information.

Monitoring of Banking Facilities Utilization

• Credit Officers monitor borrower payment records and utilization trends.
• Early detection of warning signals (e.g., trade bill rollovers, kite flying activities) allows for preemptive measures to prevent loan defaults.
• Monitoring can improve account profitability by encouraging borrowers to transact more through the bank.
• Understanding borrower transaction trends helps structure facilities according to their needs.

Warning Signals (from Bank's Current Accounts)

• Frequent exceeding of credit limits indicates cash flow problems.
• Dormant overdrafts with limited activity indicate a potential drop in sales or mismatched financing.
• Frequent cheque returns signal increasing bad debts and tight customer liquidity.
• Unusual deposit/withdrawals possibly indicate major asset transactions.
• Frequent repayment arrears (over 90 days) indicate weak debt servicing and tight liquidity.

Review of Borrower's Audited Financial, Management Account & Financial Forecast

• Historical financial data provides insight into management competence in financial resource management.
• Borrower-provided financial forecasts must be realistic, providing accurate cash flow and repayment capacity outlooks.
• Management accounts compare actual to forecast performance showing whether financial targets are met.
• Warning signals include changes in external auditors, substantial shifts in sales and profitability, large increases in stocks or receivables, or rising borrowings, which could signal financial trouble in an industry downturn.

Site Visitation to Borrower's Premises

• Frequent contact with borrowers is key to effective account management.
• Site visits allow for better understanding of borrower's business operations, identification of financing opportunities, verification of assets, and early detection of problems.
• Key observation areas include machine/equipment quality, stock levels, production efficiency, and personnel turnover, as potential warning signs.

Monitoring External Industry & Market Development and External Information

• Lenders need to stay informed about industry trends, regulations, disputes, litigations, and mergers/acquisitions affecting borrowers.
• High trade/credit inquiries indicate creditor concerns about borrowing, hinting at additional financing needs.
• Commercial disputes, particularly litigations, may significantly impact borrower financial viability, requiring lender awareness.

Loan Rehabilitation

• For loans under watchlist or special mention, loan rehabilitation is an option when borrower's business and cashflows are temporarily affected, potentially recovering.
  • Re-scheduling of loan payments may be undertaken.
  • Restructuring may involve new agreements and security changes, new funding, or other alternative security.

Loan Rescheduling

• An exercise where the bank provides forbearance for non-performing borrowers seeking more time to improve cashflow and business conditions.
• Conditions for rescheduling include temporary delays in cash flow with verifiable causes.
• Rescheduling does not require changes to existing security or loan terms.
  • Options include extending the loan's term or changing repayment schedule, interest, or payment amounts temporarily.

Loan Restructuring

• Restructuring alters existing loan conditions. Restructuring is only pursued if significant loan losses may occur via recovery.
• May entail new or supplementary loan agreements, new security arrangements, or additional funding.

Loan Recovery

• If restructuring or rescheduling fails to resolve issues, loan recovery is the last resort.
• Recovery starts with a legal notice.
• Legal proceedings follow to enforce rights over existing collateral and secure proceeds from the sale of assets to settle loan balances.
• Different approaches exist depending on the type of collateral.