Managing Bank Credit Portfolio PDF

Home About FIN367 Managing Bank Credit Portfolio Sub-topic 4.4 Next Slide  FIN367 Loan monitoring and account management will commence ✔ Reviewing a...

Home About FIN367 Managing Bank Credit Portfolio Sub-topic 4.4 Next Slide  FIN367 Loan monitoring and account management will commence ✔ Reviewing appropriateness of structure of banking after loan disbursement, and is stage 4 of credit process facilities based on trend of facility utilisation and change cycle. in borrower's business trading conditions. Loan monitoring is part of the account relationship ✔ Annual credit review to determine acceptability of management to identify business opportunity, as well as borrower's credit risk profile. risk management to identify early warning signals that may ✔ Collateral review to reassess the adequacy and quality of require remedial action by the lending bank. security and credit support. ✔ Legal documentation review to exam the validity, The scope of portfolio management and loan monitoring compliance and renewal of legal documentation to entails the followings: ensure the Bank's legal enforcement right over security ✔ Monitoring utilisation of banking facilities and remain intact. conduct of account by borrower. ✔ Assessing financial condition and performance of borrower by reviewing their financial statement and conducting site visitation. ✔ Reviewing industry and market development that affect borrower's business viability.  FIN367 Loan Account Management Annual review of account is an integral part of account management. It involves a review of the company's historical audited financial and financial forecast to assess borrower's future cash flow generation and debts servicing ability. Other areas of review include: ✔ Compliance of lending convents ✔ Outlook of the industry where borrower is operating ✔ Appropriateness of facility structure ✔ Reassess the adequacy of existing security arrangement ✔ Examine the validity and enforceability of security documentation  FIN367 Loan Account Management Any non-compliance of lending covenants serve as warning signal and reflect the incompetency of borrower's management and poor corporate governance. Gearing and dividend restriction covenant are the most common covenants that ensure financial commitment of shareholder and preservation of cash flow meet loan repayment. The breach of any of these covenants should be viewed seriously as it reflects the lack of shareholders' commitment in term of capital contribution or risk of insolvency brought by depleting capital (caused by operating losse), as well as weakening debts servicing caused by cash diversion through dividend payment.  FIN367 Loan Monitoring Loan monitoring is part of the account relationship management to identify business opportunity, as well as risk management to identify early warning signals that may require remedial action by the lending bank. Early detecting of warning signal in loan monitoring will allow lender to take corrective action to prevent account from turing into full credit default and to protect the bank from avoidable loan loss. Before a loan is classified as impaired with impairment provision, the bank may categorize the loan as Watch List or Special Mention. i. Watch List is for loan that exhibit weaknesses with potential to be downgrade as impaired within next 12 months. ii. Special Mention is referring to loan that has defaulted but not yet classified in the impaired category.  FIN367 The scope of portfolio management and loan monitoring entails the followings: 01. 02. 03. 04. Review of Borrower's Monitoring of Utilisation Site Visitation to Monitoring External Audited Financial, of Banking Facilities Borrower's Premises Industry & Market Management Account Development and and Financial Forecast External Information  FIN367 Credit Officer is required to closely monitor borrower's payment record, account conduct and utilisation trend from the Bank's internal records such as bank statement, activity 01. report, exceptional report etc. This is to detect any irregularities or warning signals such as rollover of trade bills, "kite flying" activities, dormancy of account, unauthorised excess and overdues that reflect Monitoring of borrower's weak repayment capability. Utilisation of Banking Early detection of warning signals allow lender to take pre-emptive measures to prevent Facilities eventual default of the loan. Close monitoring of borrower's account with the Bank may also provide opportunity for lender to enhance account profitability by enticing borrower to channel their transactional volume to the Bank. Lender can also boost facility utilisation by understanding borrower's transaction trend and appropriate structuring of facility to meet the change of their financing requirement.  FIN367 Warning signal can be detected from Bank's current account as follows: Frequent excess over limit indicating tight cash flow Dormant overdraft with limited activity indicated possible drop in sales; business channeled Current to other banks of funding mismatch where OD is used for long-term capital expenditure Account with financing Overdraft 01. Frequent cheque return indicating borrower may experience rising bad debts due to their Facility customer's tight liquidity Unusual large deposit and withdrawal indicating major assets/business acquisition or disposal Monitoring of Utilisation of Banking Any frequent arrears in loan repayment and interest servicing indicated tight liquidity and Loan weak debts servicing. Facilities If loan payment (principle and interest) are in arrears over 90 days, account will be classified Repayment as non-performing with impairment provisioning required. Warning signals can be detected from utilisation trend, exceptional transaction report and trade volume report as follows: ✔ Frequent requests for extension of maturity dates of trade bills may be due to tight cash flow or inappropriate funding structure as a result of financing tenure not matching the operating cycle of business. Trade Facilities ✔ Claim against Bank Guarantee issued on behalf of borrower from beneficiary indicated breach of contract obligation, and inability to pay creditor on time.  FIN367 Historical audited Financial provided The warning signals that can be detected from insight on management's competency in borrower's financials are: managing financial resources. 02. ✔ Change of external auditor or accounting policies indicating borrower could be disguising actual Financial forecast provided by borrower financial performance, and risk of qualification of Review of Borrower's must be with realistic assumption to accounts provide accurate forecast of borrower's Audited Financial, earning outlook and future repayment ✔ Substantial fluctuation in sales and profitability gives Management Account capacity. rise to risk overtrading and unstable cash flow and Financial Forecast generation. Management account provides ✔ Large increase in stocks and trade receivable reflected comparison between borrower's actual risk of stocks obsolescence, change in valuation performance and financial forecast to method and rising bad debts position that may affect determine whether borrower is in track in borrower's cash flow and debts servicing ability. achieving its financial target. ✔ Large increase in bank borrowings or financial gearing could give rise to insolvency risk in time of industry and economy downturn.  FIN367 To ensure effective account management, lender is Warning signals detected from: required to maintain close rapport and two way communication with borrower. This can be done ✔ Poor business and financial planning by through periodial customer or site visitation to management borrower's place of business. ✔ High turnover of key executive and low staff 03. A site visitation will help Credit Officer to better morale that affect productivity and efficiency of understand borrower's business, identify financing business operation opportunity and verify the stock level and assets of small business where audited account is not ✔ Poor maintenance of physical plant and available. machinery, and inefficient inventory control Site Visitation to that disrupt production and drain business cash It also allow lender to detect warning signals such as Borrower's Premises poor quality and conditions of equipment and flow machine. Excessive stock holding, idle production capacity and high executive turnover that may be an ✔ Diversify into new business which the indication of weak management and potential management lacks of expertise may dilute core financial failure. business's financial resources, and susceptible to negative development in new industry  FIN367 Lender must keep abreast with the latest development and regulations affecting borrower's business and industry. The external information such as trade dispute, public litigation, merger and acquisition, restrive industry quota or levies and increasing credit enquiry serves as warning signal on the potential threat that may affect borrower's business viability. 04. i. Credit Enquiries or Trade Enquiries Monitoring External ▪ High number of trade or credit enquiries indicating creditors/lenders' concern over Industry & Market borrower's creditworthiness. It also indicates that borrower is seeking additional financing from other banks. Development and External Information ii. Commercial Disputes and Litigation Action Commercial disputes such as warranty claim or defect liability claim and litigation action may result in borrower having to pay substantial compensation, and adversely affecting borrower's financial viability. The information on litigation may be obtained from credit information agencies, CTOS or at the Court's Registry Offices.  FIN367 Loan Rehabilitation For loan under watch list and special mention classification where borrower's business and cash flow are temporarily affected with good potential of recovery, lender may consider loan rehabilitation to assist borrower overcome its cash flow problem until business resumes its viability and debts servicing improved. i. Loan rescheduling ii. Loan restructuring Watch list: for loan that exhibit weaknesses with potential to be downgrades as impaired within next 12 months Special mention: referring to loan that has defaulted but not yet classified in the impaired category.  FIN367 Loan Rescheduling Loan Rescheduling is an exercise where the lending bank Therefore, no new loan agreement or security agreement grants indulgence for non-performance and is willing to need to be executed. It involves changing: give more time for the borrower to strengthen its cash flow and business condition. i. Extension of final maturity of the loan (e.g. the loan period) Lender will consider loan rescheduling when the expected ii. Change of instalment repayment intervals, e.g., cash flow from the business have been delayed change of monthly repayment to quarterly repayment. temporarily for reasons that can be verifiable by the Bank. iii. Change of instalment repayment amount iv. A moratorium of interest and/or principal payment, Loan rescheduling does not involve major change in e.g., waiver of interest payment for one year and existing security and loan conditions. service principal payment only  FIN367 Loan Restructuring A loan restructuring is undertaken for an existing loan There are various alternatives of loan restructuring as with significant change in the lending terms and conditions follows: and security arrangement. i. Change in loan repayment structure and overall It may involve a new or supplementary loan agreement tenor of existing loan facilities and security agreement. ii. Change in combination of loan facilities iii. New security (collateral) arrangement Lender will only enter into loan restructuring if the iv. Additional funding from shareholder, potential loan losses arising from loan recovery is large, creditor and/or lender prospect of business recovery is satisfactory and there is commitment from shareholders, management and employee of the company in execution of the business turnaround plan.  FIN367 Loan Restructuring i. Change in loan repayment structure and overall tenor of existing loan facilities o The loan instalment schedule is calibrated according to borrower's expected cash flow generation and debts servicing ability. ii. Change in combination of loan facilities o For example, conversion of term loan to a combination of term loan and overdraft to provide flexibility in principal payment. iii. New security arrangement o Borrower may be required to sell existing security assets to alleviate cash flow problem and reduce loan outstanding, and substitute with alternative securities. o It may involve additional securities provided by new owners or shareholders as part of the loan restructuring conditions, or additional credit support in the form of subordination of Shareholders' advances or Director's loan, and guarantee from new shareholder/owner. iv. Additional funding from shareholder, creditor and/or lender o Borrower may need additional funding to meet their cash flow deficit during early stage of loan restructuring. The funding can be in the form of fresh capital injection from new shareholders in order to convince leader to participate in the loan restructuring. o Shareholder's advances are to be subordinated to lending bank if the Bank provides new loan without commensurate increase in shareholders' capital injection  FIN367 Loan Recovery If borrower is not able to meet the restructured term or business is adversely affected with no potential of recovery, lender will proceed as last resort to loan recovery. The loan recovery process: First, commenced with loan recall through legal notice of demand; Second, followed by legal proceeding which allow lender to enforce their right over the loan security and use the proceeds from sales of security to settle the loan outstanding owed by borrower. Read More...  Loan Recovery FIN367 Legal enforcement under loan recovery depends on the underlying collateral In the event proceeds from realisation of security not sufficient to settle the securing the loan as follows: loan outstanding, lender can choose to write off the remaining unsettled portion if it is not significant or proceed to initiate civil proceeding against i. For property secured by legal charge, the Bank will undertake borrower and guarantor to recover the remaining loan outstanding. foreclosure proceeding by applying for order for sales from High Court Civil proceeding is a procedure commenced by way of summons in the or Land Office to sell the property by way of public auction. Once Court. property is sold by auction, purchase is reuquired to pay chargee Bank Court Judgment will be obtained and enforced in the following ways: deposit at 10% of Reserve Price with balance to be settled within 120 Bankruptcy Order days from date of sales. All sales proceeds will be credited to Writ of Seizure against unencumbered moveable properties of borrower's account to settle loan outstanding. borrower Prohibiting order against borrower's unencumbered immovable ii. For property secured by loan agreement cum assignment (LACA), the properties power of attorney in the LACA allows the Bank to sell the property by Garnishing borrower's funds in the bank way of public auction of private treaty. Judgement debtors summon against borrower or guarantor with steady income iii. For debenture (fixed and floating charge), the Bank will crystallise the Winding up petition against company floating charge and appoint receiver to sell the property by way of private treaty to settle the loan outstanding.