"Credit Operation" PDF

Credit Operation CBE, Learning and Development Department 1 Let’s Get To know Each Other 2 Training Engagement Norms Attention Time management Participation Cell phone management Experience sharin...

Credit Operation CBE, Learning and Development Department 1 Let’s Get To know Each Other 2 Training Engagement Norms Attention Time management Participation Cell phone management Experience sharing 3 Objectives of the Training Corporate Strategy and Wholesale/Retail Bank Model The Concepts of Credit and its Products/Services; Understand the Credit Origination/Wholesale Bank; Demonstrate financial, non-financial parameters of credit risk analysis; Working Capital Financing Determination and cash flow projection. Review on Credit Approval and Operation System; Comply with the credit monitoring, provisioning and Portfolio; Apply the methods used in regular loan follow-up & collection and Understand the causes of Non-performing Loans and 4 apply problem loans management strategies Contents of the training Part I:The Concept on the newly CBE- Corporate Strategy Part II: Concept of Customer Segmentation, credit and products/Services Part III : Credit Origination /Wholesale Banking/ Part IV: Credit risk management process, Part V: Credit appraisal, Part VI: Working capital requirement determination Part VII: Credit approval system, Part VIII: Credit operation management, Part IX: Pre-delinquent loan follow up and Collection Part X: Credit monitoring & portfolio management Part XI: Problem loan/NPL/ management 5 I. CORPORATE STRATEGY OVERVIEW CBE’s Current Aspect of Change Discussion Question The concept of change What were the reason for change? What aspect of CBE is currently changed?  The concept of change Making or becoming different Different from the previous state Substitution of one for another. Change is to undergo or to make or become different. Change is transformation from current state to future state CBE’s Current Aspect of Change Forces of Change/ Change Drivers Stiff Competition from private bank Poor performance in customer service delivery Poor FCY performance  increment of cost to income ratio New business Opportunity  Why Comprehensive Assessment and Strategy Design? Competition (The market share of Poor quality of assets the Bank keeps decreasing) Higher growth in operating cost as Lower employees’ productivity compared to lower revenue growth Alignment with the Inefficient digital channels Government’s aspiration to strengthen and modernize Ethiopian financial sector Poor customer service Key Transformation Areas Lines of Defense Work Stream Business Assessment Work Stream Credit and Resource management Domestic and international banking operation Risk Management and Internal Audit; including interest free banking Quality Management and Control; Marketing and product development Asset quality review and turnaround solutions Corporate and functional strategy of distressed loans Mandate definition Comprehensive assessment & strategy design work Business Assessment Work Stream IT Architecture & Cyber Security Work Stream Governance Work Stream Digital Banking; Corporate Governance Information system, technology and Cybersecurity; HR and Institutional Capacity 11 Group Discussion Discuss:- CBE’s Aspiration  Vision, Mission, values  Parameters for world-class bank  Strategic Pillars for CBE’s Transformation CBE’s Vision 11/18/2024 Mission Mission We are committed to realizing stakeholder’s value through enhanced financial intermediation globally, deploying highly motivated and skilled employees. CBE’s Aspiration Parameters for world-class bank including metrics such as assets, loan book, operating income including metrics such as share of active customers on app/mobile money, share of transactions outside the branch, level of manual processes within the bank including metrics such as return on equity and cost-to-income ratio including metrics such as NPL ratio and provision coverage including metrics such as retention, promotion, and employee engagement including metrics such as customer satisfaction (CSAT) and financial inclusion CBE’s Aspiration Strategic Pillars for CBE’s Transformation A. Establishing CBE as a secure and risk- conscious bank  Redesign E2E credit value chain (underwriting/appraisal, monitoring and collections)  Improve risk management through well-defined risk taxonomy and risk appetite, and updated risk management policies Strategic Pillars for CBE’s Transformation B. Customer centric bank with differentiated CVPs  Define clear retail, wholesale and IFB customer segments and deliver differentiated CVPs and superior customer experience  Enhance sales force effectiveness to drive cross-sell and customer coverage  Customer Centricity “In customer centric organization, all the elements: product, service & operations are lined up with each other and focused ultimately to the customer.”  Customer value proposition 11/18/2024 Strategic Pillars for CBE’s Transformation C. Digital leader scaling mobile money and digital innovation  Expand mobile money footprint by growing share in mobile payments (e.g., G2P/ P2G, C2B) and scaling agent and merchant networks  Drive digital innovation and expand digital channel functionalities and products. (e.g., micro lending, micro-saving). Strategic Pillars for CBE’s Transformation D. Driving cost-efficiency  Streamline, digitize and centralize/automate branch and back-office functions  Drive branch transformation by migrating transactions to self- service channels, simplifying the branch operating model Strategic Enablers for CBE’s Transformation E. Modern and streamlined IT architecture and technology  Strengthen IT architecture driven by data, modern technology (e.g., cyber security systems, API-based architecture)  Advanced Analytics to deliver priority use cases (e.g. Credit risk, pre-approved lending)  Build a digital delivery operating model by setting up a digital factory and incorporating agile to digitize customer journeys Strategic Enablers for CBE’s Transformation F. Collaborative customer centred organization supported by rigorous talent management and effective Corporate governance  Update organization structure to ensure customer- centricity (i.e., structure by customer segments)  establish clear talent management culture (i.e., performance management, recruiting, coaching and feedback) based on accountability and collaboration  Strengthen governance mechanisms by clarifying decision-making Strategic Pillars for CBE’s Transformation CBE by 2026 A customer-led organization Customer focused extended but prudent risk appetite, Industry-shaper, Employer of choice. Strategic Pillars for CBE’s Transformation CBE by 2026  Total Asset ETB 2.0Tn  Total Lending 1.2Tn  Total Deposit ETB 1.9Tn  Cost-to-income ratio =83. 77% FCY score 100%  Credit Score 100% Weighted Average score >=45.97  CBE’S CUSTOMER SEGMENT Wholesale Customer Segmentation Criterion 3. Medium Corporate Customers Individuals and non-individual existing customers and potential customers licensed to undertake trading business Smaller companies Mostly standards but some complex financing needs May have International business model with significant All fintech companies working with the Bank as strategic business  Deposit score 23.82%-83.77% FCY score >=32.57%  Credit Score >=43.29% Weighted Average score 9.27%-18.35% CBE’S CUSTOMER SEGMENT Wholesale Customer Segmentation Criterion 4. SME 4.1 Small Corporate Individuals and non-individual existing customers and potential customers licensed to undertake trading business Small-to-medium-sized SMEs Usually domestic focus Usually less complex management structure with fewer employees Standard financing needs  Deposit score 6.67%-23.82% FCY score 3.13%-32.57%  Credit Score 6.21%-43.29% Weighted Average score 3.66%-4.53% CBE’S CUSTOMER SEGMENT Wholesale Customer Segmentation Criterion 4.2 SME Customers Individuals and non-individual existing customers and potential customers licensed to undertake trading business  Deposit score 3.33%-6.67% FCY score 0.63%-3.13%  Credit Score =100 million 2 Sales turnover 30% >=900 million 3 Number of employees 5% >=500 4 Credit exposure from 15% >=83 million other banks 5 Foreign currency inflow 30% >= 3.2 million CBE’S CUSTOMER SEGMENT Wholesale Customer Segmentation Criterion Note All new wholesale customers shall be automatically classified under micro segment.But it may be classified other than micro segment through evaluation by corporate segment division and reviewed by VP customer experience. Public & institutional customers shall automatically be classified without scoring process Customer Segmentation Importance of Customer Segmentation  Better identify most valuable customer segments  Improve return on marketing investment  Increase customer loyalty  Improve customer service  Positively impact revenue and reduce waste 54  Facts about customers Are not dependent on us, have different choice but CBE is dependent on customers. They pay our salaries Have diverse preference and test. Time sensitive and want more convenience service. Have high service expectations. Have less brand loyalty and switching intentions. They are human beings with their own feelings and emotions and they need to be treated with respect and in a way you need to be treated. 11/18/2024  Customer Classification Internal vs External Retail vs Wholesale Domestic vs Foreigners 11/18/2024 Customer service 11/18/2024  Basic service vs. Excellent Service Basic Service Excellence Competent Passion Friendly Empathy/ Compassion Listening Relationship/engagement Timely Anticipatory/ Proactive Clear Communication Sense of Urgency Exceeding expectation. 11/18/2024  SERVICE IN CBE Utility Service & Agency Service III. CONCEPT OF CREDIT AND ITS PRODACUTS/SERVICES Credit Basics …  Credit comes from the Italian word “credere”, which means to believe, to have faith and to have trust.  It is the temporary transfer of capital from those who own it to those who use it.  Credit is a financial obligation  Credit means receiving something of value now and promising to pay for it later, often with a financial charge added by the lender. Credit : CBE’s perspective  It is a loan granted to traders and non-traders with interest (conventional) and/or charges (IFB).  It could be long, medium and short term loans.  It could also be loans with specific maturity period (term loan), open credit (facilities like O/D, L/C, pre-shipment..)  It could be secured or unsecured. Major Credit Customers Limited Companies (PLC & S.C) Public Enterprises Associations/Cooperatives/Unions Individuals (traders & non-traders) Government (Regional & Fed.)  Meeting the To support the vision, mission, economic strategies and development mandates of the of the nation bank Profit generation Objectives of providing credit Credit process ? Governing Rules and lending principles? Eligibility criteria and loan processing documents ? 1.4 CREDIT PROCESS CREDIT GRANTING PREREQUISITES 28 1.5 (Governing Rules)  Laws and Regulation of the country applicable to banks’  NBE directives applicable to credit  Directive for Asset Classification and Provisioning No. SBB/69/2018;  Credit Exposure to Single and Related Counterparties Directive No. SBB/53/2012;  Directive for the Establishment and Operation of Credit Reference Bureau No. CRB/02/2019 and  Operationalization of Movable Collateral Registry Directive No. MCR/01/2020 etc. 68  Credit Policy  General descriptions on what to do (product, sector, terms, collateral, NPLs etc).  Helps to create the framework, requirements and tolerance limits for lending;  Credit Procedure  Describes on how to do credit activities  Memos and Circulars  Amendments, new issues etc 69 1.6 Lending Principles  Ensure "know-your-customer" principles;  Grant credit in a manner that ensures full repayment;  Identify and manage credit risks in all products and services;  Ensure early recovery or resolution of problem loans and advances;  Practice prudent credit sanctioning standards; 70 Lending Principles…  Limit overall credit risk exposure at individual borrower, group of connected parties and portfolio level;  Clearly specify the risk management strategy by setting the credit processing into two broad teams (Credit management and Credit Appraisal teams)  Increase the profitability of the Bank to the satisfaction of the stakeholders 71 1.7 General Eligibility Criteria/to whom?  All persons engaged in lawful and credit worthy business/investment activities.  The business credit applicant shall present renewed trade license for the current fiscal year, or investment license for new projects; (what about Cooperatives?)- NBE requirement  All applicants who are engaged in business shall present a tax identification number /TIN/- CRB/02/2019 72 General Eligibility...  Applicants (for individual including Spouse)/mortgagers/ guarantors who are engaged in business shall submit tax clearance certificates - NBE/MOR requirement  The applicant and/or any of its major shareholders/subsidiaries shall have no NPL- CRB/02/2019  The applicant shall not engaged in tax evasion, or in any breach of exchange and control regulations, mal-operation of checking account until the rehabilitation period is expired- NBE Requirement 73 General Eligibility Criteria…  The applicant shall fulfill at least the required minimum equity contribution which depends up on the banks risk appetite;  The applicant shall present all the documents/information demanded by the Bank (SBB/69/2018 and bank Procedure) 74 General Eligibility Criteria…  The applicant‘s business shall be financially viable, legally acceptable, technically feasible and environmental friendly- (Project loan)  In addition to these criteria customer has to fulfill the specific eligibility criteria for each loans and advances set by the bank. 75 1.8 Required Loan Processing Documents  Legal documents (trade license, TIN, tax exempt certificate, tax clearance certificate, MOA, AOA, power of attorney if any, marriage/non- marriage, etc.)  Collateral related documents (LHC, approved plan, libre, Performa invoice, valuation report, if applicable etc.)  Financial related doc. (Financial statements- Audited*/ Provisional/Interim, business plan/feasibility study etc. )  Management Profile (CV, employment agreement, education credentials etc.)  Other Internal Documents (credit information, account statement, credit history etc) 76 Discussion 1. Credit Products/Services 2. How can we determine a suitable credit product for a particular business? Credit Products Open Facilities Term Loans Provided to relieve short term cash flow/working capital Granted for working capital problems and/or project finance To It is repayable on demand. It is availed for a maximum The loan can be repaid in a period of one year and reviewed every year; lump sum on maturity, or in The outstanding balance of a periodic installments facility except LG shall be within the approved limit at the time of During grace period the renewal request. Except for OD it may be one borrower is relieved from time/revolving principal loan repayments. 78  1. Overdraft Facility It is a form of credit facility by which customer may be allowed to draw beyond the deposits of its current accounts for the sole purpose of the day-to-day operational needs of a viable and ongoing business. It is availed for a maximum period of one year and reviewed every year Interest is charged and collected on the Overdraft Facility’s outstanding balance on a daily basis. It is repayable on demand. The Bank shall callback the outstanding overdraft loan balance at any time when its overall performance is unsatisfactory and show sign of diversion of funds. 79 2. Overdraw credit Facility It is a temporary facility that grants a customer the right to withdraw a specified amount of fund over and above the Overdraft limit The bank may allow Overdrawal for a maximum period of three months and at most two times in a year The overdrawal amount shall not exceed 15% and 10% of the existing Overdraft facility limit for risk grade 1 and 2 Corporate customers respectively or Birr 30,000,000, whichever is lower; and The applicant shall fully settle the initially overdrawal amount before he/she/it lodges the second request. Only HO Credit Approving Committees may decide on overdrawal requests. 80 3. Merchandise Loan Facility  It is a short-term credit facility provided by the Bank against which the merchandise or documentary evidence (Railway Receipt, Warehouse Receipt and Airway Bills) is held as a pledge or collateral for the loan with Maximum advance of 70%.  Goods acceptable for advance of merchandise loan facility shall: be easily marketable/fast moving; not be perishable; be with determinable value; have a relatively stable price; and be insurable; 81 4. Warehouse Receipt Financing (WRF) WRF is a financing mechanism provides for members and clients of the ECX by pledging the ECX’s warehouse receipts(electronic goods received note) issued in their names. Exchange Settlement Team under the Banking Operations is responsible for all information exchange from and to the Ethiopia Commodity Exchange (ECX). The commodities are agricultural products accepted by the ECX to be deposited and traded at its floors. 82 5. Financing Against National Warehouse Receipt It is a type of commodity finance where the loan is secured against a depositor’s WHR issued by the Authorized Warehouse Operator. The Warehouse Receipt is a physical (paper-based) document of title designed and printed originally by the Ministry of Trade and Regional Integration, The bank shall confirm the completeness and accuracy of the data; name of depositor, commodity type, warehouse operator, commodity grade (quality), weight and value etc. 83 5. Financing Against National… As per Article 83(5) of Movable Property Security Right Proclamation No. 1147/2019, the bank may not give any notice if the collateral: May perish before the end of the ten working days after the Bank obtained possession of such collateral; May decline in value speedily; or Cost of care and storage is disproportionately large relative to its value. 84 6. Import Letter of Credit Facility It is extended to applicants who engage in the import business, or other applicants who import for various purposes on payment of a certain percentage of the value of the document while opening a Letter of Credit. Depending on the financial strength of the customer, the letter of credit facility account performance and marketability of the import goods, the minimum margin to be paid on Import Letter of Credit facility shall be 30% of the document value. The Bank may extend a one-time and/or revolving Import Letter of Credit Facilities 85 7. Pre-Shipment Export Credit Facility It is a loan extended for purchase of raw materials, processing and converting them into finished goods, warehousing, packing and transporting the goods until the time of shipment. The financing shall be availed against valid sales/export contract or bona-fide purchase order from a foreign buyer. It can be one time or revolving and renewed year. The maximum advance for Coffee, Sesame and other export items shall be 95%, 85% and 80% respectively. 86  Eligibility… The applicant must have earned at least USD 200,000 and USD 100,000 or equivalent currencies for livestock export and other exporters respectively during the last twelve months preceding the application date and shall offer collateral that covers at least 60%of the approved facility limit/amount except for livestock exporters, If the applicant is new exporter or existing exporters that do not fulfill the condition stated herein above he/she/it should have been engaged in any viable business at least for one year or he/she/it shall offer collateral that covers at least 40% of the approved facility limit/amount. 11/18/2024 Eligibility… For high value customers that earned at least USD 1,000,000 or equivalent of other currencies For risk grade 1 and 2, the applicant shall present collateral at least 40% coverage of the approved facility limit; For risk grade 3, the applicant shall present collateral at least 50% coverage of the approved facility limit; and For risk grade 4 and above, the applicant shall present collateral at least 60% coverage of the approved facility limit. 11/18/2024 Eligibility… The applicant to be financed against sales contract with advance mode of payment terms shall fulfill the following additional conditions; Advance payments shall be effected at a later date from the financing/loan disbursement date. Advance payments shall be channeled through CBE (this shall be indicated in the sales contract) The customer shall sign undertaking letter to fully settle equivalent amount of loan from the advance received before shipment of the goods 11/18/2024 Pre-shipment Export Credit Facility… For coffee, sesame and other export businesses, the maximum advance rate shall be 90%, 80% and 75% of the respective contract values and, the advance amount shall be channeled through ECX pay-in account or supplier’s account, as the case dictates. The proportion of the export proceeds required to be channeled for the settlement of the advances of pre- shipment export loan shall be 5% plus the percentage of the advanced loan for all export items and 3% for manufactured export items 11/18/2024 Pre-shipment: Contract Based Channel Financing It is a form of pre-shipment advance to be extended to industrial park enterprises which are engaged in the manufacturing of goods to be supplied to manufacturers in the value chain for final export. The buying enterprise must operate in the same industrial park; A tri-partite agreement shall be signed between the Bank, the applicant and its buyer Eligibility Criteria: The applicant shall present a valid purchase order or sales contract; The subject matter of the contract/items to be sold must be an input for exportable item or items that shall be exported to a foreign market after further processing; 11/18/2024  Pre-shipment: Livestock Export Financing Extended for the purpose of purchasing, quarantine and transportation of live animals for export purposes. Eligibility: Sales contract from a foreign buyers for a specific quantity of cattle in type and other characteristics with acceptable mode of payment. In the business of livestock export at least for one year prior to the date of application, and this shall be supported by evidence of export proceeds documents. the maximum amount of loan (total credit exposure) to be provided to any applicant shall not exceed Birr 100,000,000 (Birr one hundred million). The applicant shall have appropriate place for quarantine either own property or rented facilities. 11/18/2024 Pre-shipment: Advance against Export Bills It is a is a post-shipment export credit extended to exporters, upon presentation of all relevant export documents, to bridge the gap between the shipment of goods and the realization of proceeds; The advance on export bills can be advanced for a period of fifteen (15) days; The foreign banking unit is responsible for ensuring the settlement of the loan from the export proceeds. Eligibility Criteria: An advance on export bills can be made to any exporter who presents complete and satisfactory export document in compliance with terms and conditions of the letter of credit; 11/18/2024 Evaluation of Export Performance of Customers… Disincentive measures: Increase the prevailing interest rate to the prime lending rate +3% Reduce the existing facility limit and maximum advance rate; Credit facility callback/Conversion to Term Loan, Cease disbursement of the existing pre-shipment export credit facility; Forward the case to the respective workout management team; and Others as appropriate 11/18/2024 Agricultural Output Financing… Granted for unions/cooperative which have a valid forward delivery contract/sales contract arrangement with world food program(wfp) for the purchase and processing of food grains Conditions Tripartite agreement shall be signed among the bank, the borrower and the buyer (world food program) which constitutes: The buyer (WFP) shall agree to effect payments to the loan account (in birr) from its foreign currency account maintained with the CBE. Sales contract shall not be cancelled without the prior consent and agreement of the bank 11/18/2024 8. Letter of Guaranty Facility A written promise/irrevocable obligation by the Bank to compensate the beneficiary in the event that the obligor fails to honor obligations in accordance with the terms and conditions of the agreement/contract. The Bank‘s Legal Adviser/Officer shall check the terms and conditions of the contract to protect the interest of the Bank The Bank provides guarantee services to both local and foreign customers A foreign-currency permit from the NBE should, however, be obtained for any form of guarantee that the Bank is requested to issue in favor of foreign beneficiaries. The duration (term) of any guarantee instrument will depend on the contractual agreement signed by the parties involved. 11/18/2024 Letter of Guaranty Facility… When is LG issued? 1. When a local customer requests the CBE to issue a letter of guarantee in local currency to a local beneficiary: The Branch Manager and Manger Branch Business jointly issue a letter of guarantee against cash collateral. If the guarantee request is backed by non-cash collateral, the CRM and the Legal Adviser/Officer shall jointly issue a Letter of guarantee in favor of a beneficiary, after properly approved by a credit approving committee through formal loan approval process. The Bank shall collect the appropriate guarantee fee, as per the Bank‘s term and tariff book before issuance of the guarantee instrument. 11/18/2024 Letter of Guaranty Facility… 2. When a local customer requests the CBE to issue a Letter of Guarantee in a foreign currency to a foreign beneficiary; The International Banking Services may issue Letter of Guarantee when a local customer requests the CBE to a foreign beneficiary against cash collateral. If the guarantee request is backed by non-cash collateral, it shall be processed and approved through the Credit Business Process, and International Banking Services shall issue the guarantee in favor of the beneficiary. 11/18/2024 Letter of Guaranty Facility… 3. When a correspondent Bank requests the CBE to issue a guarantee in favor of a local beneficiary shall be treated as follows: The bank shall issue a guarantee against foreign bank counter guarantee; The guarantee period shall be determined based on the request and the maturity of foreign bank counter guarantee; It will be issued by international banking service after the facility is approved by the credit division. 11/18/2024 Types of Letters of Guarantee 1. Bid Bond Bid/Tender Bonds are guarantees issued by the Bank in to compensate the beneficiary for the event that the bidder withdraws from the bid or fails to accept the award when he/she/it becomes the winner. The Bank issues a Bid Bond to either local or foreign beneficiaries 11/18/2024 Types of Letters of Guarantee… Performance Guaranty A Performance Bond is a type of guarantee that the Bank issues in favor of a bid organizer (beneficiary) in case the bid winner fails to deliver the goods or to perform the services in accordance with the terms and conditions of the contract. Retention Guarantee It arises when a seller or a contractor wishes to collect any retention held on a contract by presenting a bank guarantee to the party accepting the release of the retention (beneficiary). 11/18/2024 Types of Letters of Guarantee… Advance Payment Guarantee Issued in favor of a buyer who makes the advance, upon the request of the seller or the contractor who received the advance. An Advance Payment Guarantee ensures that the seller, or contractor, will return the advance payment made by the beneficiary, in case of failure to supply the goods or services on time, in part or in their entirety. The guarantee agreement may be constructed to reflect a proportionate reduction of the advance as the contract is performed. 11/18/2024 Types of Letters of Guarantee… Suppliers’ Credit Guarantee issued to provide security to beneficiary on behalf of a customer, representing a commitment, in case the debtor fails to repay in accordance with the terms and conditions of the contract. It arises when a local customer enters into a purchase contract with either a local or a foreign supplier agreeing to repay the purchase price, usually on an installment basis over a longer period of time. 11/18/2024 Types of Letters of Guarantee… Steamers’ Guarantees/Letters of Indemnity for Missing Documents Issued at the request of the buyer in favor of a carrier, in circumstances where the bill of lading is missing /delayed but the goods/cargo/ arrive earlier. It shall; however, be handled by the International Banking Service. Customs Duty Guarantee Issued in favor of the Customs Authority to meet the requests of the beneficiary in respect of customs duties in circumstances where the goods imported without payment of customs duties are not re-exported and the respective customs duties have not been paid 11/18/2024 Types of Letters of Guarantee… Customs Dispute Settlement Guarantee - issued at the request of a customer in relation to disputes that may occur between the customs authority and the customer for an allegedly unpaid custom charges and when the former demands the customer to present bank guarantee until such time that the dispute is settled. Other Forms of Guaranty - The Bank may entertain guaranty requests of customers depending on the risk and benefits involved therein. 11/18/2024  Term Loan Short-Term Loan could be granted up to a maximum of one year. Medium-Term Loan has a maturity period longer than one year, but not exceeding a maximum period of five years. Long Term Loan has a maturity period longer than five years, but not exceeding a maximum period of twelve years. Depending on the nature and cash flow of the business, the Bank may provide a maximum grace period of six months for short-term loans, two years for medium term loans, and three years for long-term loans. 106 Types of Term Loan by purpose… 2.1. Motor Vehicle Loan A Motor Vehicle Loan is a term loan granted for the purchase of new model motor vehicles for borrowers in the transport sector as well as other business sectors. The loan shall be repaid within a maximum period of five years. For Grade 1 and 2 customers 35% equity, Grade 3 40% equity and Grade 4 and above 45% equity is required 11/18/2024 2.2. Motor Vehicle loan for Exporters It is a term loan arranged to finance exporter‘s business (export of coffee and sesame with USD one million and above export proceed in the last year) in the form of fixed asset investment which helps them to overcome problems of transportation. The vehicle shall be dry cargo truck with trailer with minimum loading capacity of 300 quintals and brand new. For Grade 1 and 2 customers 20% equity, Grade 3, 30% equity and Grade 4 and above 40 % equity is required The loan shall be repaid within a maximum period of five years including maximum of six months grace period 11/18/2024 2.3. Construction Machinery Loan It is a loan extended for the purchase of brand new construction machinery; The applicant shall be in the business at least for one year; For Grade 1 and 2 customers 40% equity, Grade 3, 45% equity and Grade 4 and above 50% equity is required. 11/18/2024 2.4. Special Construction Machinery and Dump Truck Loan It is granted for contractors who have valid contracts with the Federal or Regional Governments offices and/or Public Enterprises; The loan is to be extended for the purchase of brand new construction machineries; For Grade 1, 2 and 3 customers 30% equity, Grade 4, 35% equity is required; The loan for purchase of construction machineries shall be paid within five years including six months grace period. The loan for purchase of dump trucks shall be paid within three years including six months grace period. 11/18/2024 2.5. Infrastructure Construction Term Loan It is a working capital term loan to be granted for contractors/sub-contractors who have valid contracts with the Federal or Regional Governments offices and/or Public Enterprises. In this regard, the applicant shall bring a letter of intent from the institution/s, which states that the principal contractor has a valid contract and the sub-contract is recognized by it/them. The loan does not, however, include the cost of construction machineries and other fixed assets. 11/18/2024 Infrastructure Construction Term Loan… Conditions The applicant must not be financed by CBE or other banks for the same project/contract except for advance payment Guarantee. A tri-partite agreement shall be signed between the Bank, the borrower and the concerned governmental organ/employer. The tri- partite agreement shall encompass among others, the following terms; An agreement by the employer to channel payments to Commercial Bank of Ethiopia. Consent by the employer/consultant to provide an independent performance evaluation report that encloses discrepancies by the contractor, if any, along with their level of sensitivity. Consent by the employer to inform the bank up on cancellation of the construction contract. 112 Infrastructure Construction Term Loan… Conditions … The applicant/s shall open a Current Account, Special Proceed Account and Retention Account in the branch where the loan is to be disbursed. The Bank shall finance a maximum of 10% of the contract value. The applicant and/or major shareholder/s shall sign personal guarantee to the loan The Bank may request additional collateral as the case may be. Applicants that score 60% or more, based on ratings depicted No. 2 ‘Ratings’ shall be eligible for the credit facility 113  Infrastructure Construction Term Loan… Criteria for rating Customers Criteria Rating 1 Executed project/s in the Past 3 Years* 40% Percentage of completion of the project/s at 2 hand** 30% 3 Credit Risk Grade 30% Total 100% 1. * Executed project/s refers to those projects performed by the contactor in the latest three years excluding the project for which financing is requested. 2.* * Project/s at hand refers to the project/s for which financing is requested. 114  Range/Point S. Criteria 10% 20% 30% 40% n. Road 100,000,000- 300,000,001- 500,000,001- Projects (In >700,000,0000 Executed 300,000,000 500,000,000 700,000,000 Birr) Projects in 1 Other the past 3 150,000,001 Infrastructur 50,000,000- 250,000,001- years* – >350,000,0000 e Projects 150,000,000 350,000,000 250,000,000 (In Birr) implement 30% 20% 15% 10% ation % of 2 % the project 0-10% 10-15% 15-20% at hand* 20-25% Credit Risk 30% 20% 10% 5% 3 Grading 115  Infrastructure Construction Term Loan…  The level of financing for applicants that score 60% or more shall be determined based on the score achieved, as below Range of Level of financing (% of contract Score Achieved (%) value) 60-65 5 66-70 6.5 71-80 8 ≥80 10 116  Infrastructure Construction Term Loan… Special Proceed Account Special Proceed Account is an account opened for the sole purpose of receiving payments from the Employer. Twenty five percent (25%) of each proceed received in the Special Proceed Account shall be retained until that amount equal a sum of one installment payment. Seventy percent (70%) of each proceed received shall be credited to the customer account. On repayment date, the amount kept in the Special Proceed Account shall be credited to the loan account. Retention Account Retention Account is an interest bearing saving account where the pass book is kept with the respective branch manager till the loan is settled. 117  2.6. Investment Financing for Enterprises Operating in Industrial Parks It is extended to enterprises operating in industrial parks for the purpose of acquiring fixed assets as well as financing permanent (initial) working capital requirements. The loan shall be granted for a maximum period of five years and grace period of one year. Equity contribution for local investor 20%, and foreign investor 50% 11/18/2024  2.7. Partial Financing It is a financing scheme whereby the Bank covers a portion of the auction price of foreclosed/acquired properties; The purpose of partial financing scheme is to expedite the recovery of the Bank‘s non-performing loans and to foster the disposal of acquired properties. The maximum repayment period of building/business establishment shall be 15 years, for vehicle 3 years and machinery 5 years. 119  Partial Financing… The applicant shall pay minimum cash down payment of 30% of the floor price for auction value greater than Birr 10,000,000 and 30% of the winning price for auction value less than or equal to Birr 10,000,000; In case of financing foreclosed properties, if the requested amount exceeds the floor price of the auctioned/foreclosed property, the applicant should offer additional collateral in the form of building or other acceptable collateral to fully cover the excess amount of loan. However, in the case of acquired properties no need to request additional collateral. 120  2.8. Syndicate Loan A Syndicate Loan is a form of term loan that is provided between the CBE and other financers due to the volume of the fund and the magnitude of the risk involved. The term of the loan is often medium to long in nature. The purpose of Syndicate Loans is to finance medium or long-term investment ventures that demand a large amount of funding together with other financers, diversify risk and reduce liquidity problems. The funding may be used to acquire fixed assets and may also incorporate a working capital for the project under consideration 11/18/2024  2.9. Agricultural Term Loans 2.9.1. Agricultural Input Loan - It is a short term loan granted for regional states/cooperatives/ associations/unions for the purchasing and distribution of fertilizers, improved seeds and other agriculture farm mainly to small holder farmers, cooperatives, unions and other delegated legal or natural persons. 2.9.2. Commercial Farming Term Loan - It is short to long term loan granted to Associations, Companies or Individuals engaged in modern commercial farms or agro- processing industries for working capital and/or acquiring/leasing/constructing fixed assets 11/18/2024  Commercial Farming Term Loan… The Bank gives priorities to modern commercial agriculture ventures that produce for export market. The Bank may finance both rain fed and irrigation system farming. However, in case of irrigation farming, the applicant shall present a permission letter to use the nearby river/water fall/ for irrigation purpose from the concerned government organ. The Bank may provide a maximum grace period of five years for plantations (such as coffee farm) and three years for other agricultural produces. 11/18/2024  Commercial Farming Term Loan… Eligibility For new or expansion projects the applicant shall contribute at least 35% of the project cost. However, if the applicant is able to offer additional collateral the equity contribution can be lowered to 20%. The applicant shall recruit adequate number of agricultural experts to manage the overall farm activities. The applicant shall provide land holding certificate and/or land lease agreement with lease right shall be binding until the tenure of the loan period plus two years. The applicant should present evidence that lease payment of the current period (due amount) is effected to the concerned authority. 11/18/2024 Commercial Farming Term Loan… Eligibility… The applicant shall have a minimum of 30 hectares of land. However, for high value crops (e.g., vegetables, fruits, etc.), the Bank may finance the farm regardless of the size of the land. If the financing is required for Coffee Plantation, in addition to the above criteria; Forest coffee shall not be considered as equity contribution and collateral. The land holding/lease right shall be binding until the tenure of the loan period plus five years and shall be registered by the appropriate registering government organ. 11/18/2024 Agricultural Term Loan 2.9.3. Agricultural Machinery Financing for Small and Medium Farmers It is a loan extended for small and medium farmers having a minimum farm size of 2 hectares but below 30 hectares of land. a term loan granted for the purchase of brand new Agricultural machineries such as Tractor with its accessories However, the loan does not include the cost of spare parts. The loan shall be repaid within a maximum period of five years including a maximum grace period of six months. The applicant shall contributed equity of 30% 11/18/2024 Agricultural Term Loan 2.9.3. Cotton Farm term loan financing Against DBE’s Guarantee Cotton Farm term loan against DBE‘s guarantee is a short-term loan granted to cotton producers to finance their working capital requirements for post-sowing cultivating activities, cotton harvesting and ginning purpose based on the production capacity, previous year‘s sales performance and other related cost requirement against DBE‘s guarantee. The maximum repayment period for cotton farm term loan against DBE‘s guarantee is one year. 11/18/2024 Agricultural Term Loan 2.10. Micro-Finance Institution’s Loan A Micro-Finance Institution‘s Loan is a loan availed to the Micro-Finance Institutions in the form of term loans that are repayable within short to medium terms. The Bank will extend credit to the Micro-Finance Institutions for alleviating their financial constraints in providing credit to micro-entrepreneurs, thereby enhancing their lending capacities. A Micro-Finance Institution‘s shall meet all relevant policies and directives of the National Bank of Ethiopia regarding: Reserve requirement; Liquidity requirement (20% of deposit); Capital adequacy requirement (12%) and Minimum paid-up capital requirement and others (Birr 10 million or 7 years for existing). 11/18/2024 2.11. Channel Financing Is a form of short-term loan rendered to potential credit customers recommended by existing CBE‘s prominent customers with which they have a business relationship. The loan is provided after the prominent customer provides unconditional letter of guarantee to CBE or after other acceptable collaterals. The guarantor shall present the recorded business relationship including payment track record and level of purchases/sales. 2.12. Urban Utilities Financing It is a type of short and medium-term loan granted to individuals or limited Companies engaged in supplying urban utilities such as dry and liquid waste management, abattoirs, public ambulance services, fire fighting, street lighting, road asphalt and pavement works, sanitation, roadside public latrine service, and development of city parks. 129 2.13. Consulting Firm Financing It is a form of short-term loan extended for the purpose of working capital financing to business professionals engaged in rendering professional services such as engineering, ICT, law, accountancy, management, architecture, art, etc. 2.14. Inter-bank lending It is a short-term loan extended to alleviate liquidity shortage of other commercial banks. 130 2.15. Idea Financing It is a term loan that is extended for the purpose of implementing scientific studies. The loan can be granted for commercial/mass production and marketing of the creative idea that have obtained recognition from the intellectual property right protection office. The bank may extend the loan for a maximum period of ten years with two-year grace period. The loan may be availed without collateral. 11/18/2024 2.16. Import Letter of Credit Settlement Loan It is a form of loan extended to a borrower by converting the outstanding LC document‘s value either to a merchandise loan facility or a term loan for a maximum period of one year. It is granted to customers with credit risk grade- 1or 2 or 3 who encounter temporary cash flow problem. To be converted to a merchandise loan facility, the requirements stated under merchandise loan facility shall apply and a tripartite agreement shall be signed among the customer, the Bank and Ethiopian Shipping and logistic Services Enterprise or any other legal transitory. 11/18/2024  2.17. Housing Development Loan It is a form of term loan granted for the purpose of developing residential houses initiated by Regional/Federal government organ to alleviate shortage of residential houses. The loan is rendered to government organ through special arrangement of issuing coupon bond accompanied by letter of guarantee from Ministry of Finance and Economic Development with maximum maturity period of 10 years. 2.18. Loan against Corporate (Coupon or Term) Bond It is a type of long term loan granted to public enterprises against their issued bond to finance their financial needs. The maximum maturity period of both types of bonds is 10 years 11/18/2024 2.19. Lease Financing Type of loan that is to be extended for the purchase of capital goods and working capital. The main borrower is the Regional State. However, the Regional State may designate and delegate other appropriate Institution to administer the loan. The loan shall be repaid within a maximum period of ten years including three years grace period. 11/18/2024 Discussion How is credit facility limit determined, such as OD, Pre-shipment, LG? IV. Credit Origination Wholesale/Retail Banking Is there any contradiction between team spirit and independency between Wholesale and Credit Divisions team? 137 Authority and Responsibility The Wholesale and Retail- Banking Division primary mandated to foster and promote that the CBE has adequate and proper tools and mechanisms in to place to address the end- to-end business need of its Wholesale and retail customers respectively. 138 How credit requests are Originate/Process? 139 Credit origination and process Recruitment & Acceptance of Credit Decision Credit Application Decision Communicatio by Wholesale n /Appeal Banking Team hearing/ Document Contract Formation , verification and Signing, Registration, Conducting Credit insurance & Preliminary appraisal/recomm disbursement interview endation by the CA Officer/Expert/Te am /Consultant CREDIT Pre and post – delinquent loan MONITO collection and RING follow up Collection of the Origination of required LAF & sending documents to the CA team workout loans management  Credit origination and process Credit requests shall be originated from the Wholesale/Retail Banking Team; The Wholesale/Retail Banking Team shall advice customers and sell the Bank’s credit products and services as per the Bank’s credit policy and procedure; Credit customers shall be recruited primarily based on their creditworthiness. In addition, their resource potential can be considered The Wholesale Banking Team: conduct KYC, prepare DDR and submit credit request to Credit. However, credit requests of Micro Business processed by WS Team as per the pre-established criteria/credit scoring; The Retail and Branch Banking Team: recruit retail customers and process requests based on standard checklist and criteria/credit scoring 141  Credit Origination  The Customer Relationship Manager/Directors-Credit Management Team/Branch Manager/District Directors/Managers-Credit Management/Consumer Loan Officer is principally responsible for recruitment of potential customer based on the priority of the Bank.  The customer or his/her/its legal agent may present formal credit request to the Bank in writing in person or through electronic media.  At its convenience, a customer can present credit application to the Branch or Credit Business Centers. 18 November 2024 142 Credit Origination…  For Corporate and Public customers, the CRM may collect documents at customer‘s business premises  The Branch forwards the request to Credit Business Centers immediately after accepting the documents and deliver the checklist for the remaining so that the customer would fulfill the necessary documents at CPC.  For branches located more than 30 km from the center, documents shall be forwarded after completion of all the required documents as per the checklist. 18 November 2024 143  Credit Origination…  If the customer‘s credit application is accepted, the Customer Relationship Manager shall provide acknowledgment letter after fulfillment of all the necessary documents.  However, acknowledgement letter for project financing request shall be provided after the documents are reviewed by Credit Appraisal officers/experts.  The Branch collects and send customer‘s application, along with relevant documents, to the Credit Management Team for new customers or to the CRM for existing customers. 18 November 2024 144  Credit Origination…  For outlying area loan requests that are beyond the discretionary lending limits of the Districts, the CRM at the Head Office Credit Business Center shall collect all the required documents and information and conduct due diligence report in collaboration with the concerned District Office.  Director-Credit Management/Manager-Credit Management is also responsible to collect credit application of new customers that apply for a credit at Credit Business Centre and classify them and introduce them with a CRM. 18 November 2024 145  Credit Origination…  The Customer Relationship Manager is responsible for conducting the due diligence assessment on the customer by collecting all the required loan processing documents from the customer.  However, it has to be aligned with the objectives of the credit business, which are mainly maintaining quality loan portfolio, timely loan delivery and cost effectiveness.  The Legal Adviser/Officer is responsible to provide appropriate legal opinion regarding the legality of the business and related issues in written form as requested by credit performers. 18 November 2024 146  Credit Origination…  If the Branch is located beyond 30km from the Credit Business Center, the Branch shall conduct the due diligence by collecting all the required loan processing information and send to the center.  The CRM shall check completion of it, re-produce DDR and forward to the Credit Appraisal Team and recommend after completion of the Credit Appraisal.  Business visit, to collect loan processing documents/information, from the center especially for remote branches, shall be done based on the amount of loan requested and/or relevance of the remaining information in consultation with the respective Director/Manager. 18 November 2024 147  Interview  The main objective of interview is to solicit adequate and complete information and to conduct due diligence on the application.  Immediately after a credit request has been lodged, the CRM will conduct a detailed face-to-face interview with the applicant to obtain full information pertaining to the credit request. The interview, as appropriate, should cover the eligibility criteria and the following additional items.  The essence of the borrower‘s business;  Business conditions, such as production, sales, etc.;  The types of products or services handled; 18 November 2024 148  Interview…  The purpose for which the funds are required;  The amount and nature of other liabilities of the borrower;  The cash-flow which the facility is to be repaid, taking into account working capital and capital spending requirements;  The main customers and suppliers of the business;  The reliability and sustainability of the supply of goods/raw material;  The reputation of the buyer;  The availability of an alternative market; 18 November 2024 149  Interview…  The external factors, which can influence the success or failure of the borrower in a volatile environment;  The collateral being provided;  The compliance with good environmental practices and regulations and the impact of any potential clean-up liabilities;  The status of the borrower‘s economic sector and his/her/its position within that sector; 18 November 2024 150  Interview…  The willingness of the shareholders/owners and management to repay loans and their track record with the Bank;  Whether there are any unusual risks foreseeable at the outset;  The competence of the management; and  Any other information considered necessary to assess the risk of the proposal. 18 November 2024 151  Interview…  On the basis of the information gathered through interview, the CRM shall decide on the request. If the customer is not eligible, he/she may reject the credit application in consultation with his/her immediate Supervisor and report to the Director-Credit Monitoring and Portfolio Management Team in writing stating the reasons for rejecting the request. 18 November 2024 152  Required Loan Processing Documents  It depends on the nature of the business and the type of the credit product requested, however the following are the major documents to be requested for a certain credit product:-  Legal documents (trade license, TIN, tax exempt certificate, tax clearance certificate, MOA, AOA, power of attorney if any, marriage/non-marriage, etc.)  Collateral related documents (LHC, approved plan, libre, Performa invoice, valuation certificate, if applicable etc.)  Financial related doc. (Financial statements- Audited/ Provisional/Interim, business plan/feasibility study etc. )  Management Profile (CV, employment agreement, education credentials etc.) 153  Required Loan Processing Documents  If the customer’s application is accepted, the CRM shall collect all loan processing documents as per the checklist.  The CRM shall ensure that the credit applicants have submitted financial statements. The statements may be actual and/or projected. 18 November 2024 154  Required Loan Processing Documents…  All businesses established as share companies (regardless of the requested loan type and amount), and private limited companies, sole proprietorship and partnership (whose total credit exposure is Birr 5,000,000 and above), which have been in business at least for one year shall submit the latest fiscal year audited financial statements. In addition to the audited/provisional financial statements, the latest interim financial statements should be presented. 18 November 2024 155  Required Loan Processing Documents…  The audited financial statements presented by the applicant shall be prepared and audited by external auditors. External auditors, shall mean persons/companies who have certificates of professional competence duly authorized by the relevant institutions/authorities and those organs established at the federal or regional level to organize and register cooperative societies in line with proclamation No. 985/2016 (as amended). 18 November 2024 156  Required Loan Processing Documents…  All businesses established as private limited companies with credit exposure of less than Birr 5, 000,000, and sole proprietorship and partnership businesses with total credit exposure Birr 1 million Birr 150 million, all project & public loans regardless of amount B Greater than Birr 30 birr 30 million Dist. Workout ≤ Birr 10 million HO Workout > Birr 10 million Decision Execution 1. Communicating the Credit Decision To be communicated immediately in writing by CRM with terms of and conditions set to be, if any, shall be stated clearly. When the credit decision is declined reason should clearly explained. 2. Contract preparation Loan and security contracts prepared commences immediately after getting the customer‘s consent for acceptance. 3. Loan Disbursement Loan/credit facility shall be disbursed after proper execution of all loan contracts, security documents and insurance policies and upon fulfillment of all preconditions.  PART VIII CREDIT OPERATION MANAGEMENT Credit operation… Credit operation management team of the Bank shall be responsible for the credit process that begin immediately after receiving credit approval decision from respective RM up to loan disbursement and informing the Loan Collection team about the new disbursement to initiate loan follow up. 274 Credit Decision- Making process Every credit decision shall be immediately communicated by the respective CRM to the customer in writing by stating the terms of the credit decision and conditions set. When the credit decision is declined, the letter should clearly state the reason for the credit decision. If the customer is dissatisfied with the bank decision, he/she/it can request appeal After fulfillment of the terms and conditions stated in the credit decision (signed LAF), the RM shall submit the loan case to Credit Operation Team, after getting registered the case transfer on the log kept with Director/Manager-Wholesale Banking. 18 November 2024 275 Credit Decision- Making process Appeal The Bank entertains appeal of the customer‘s in order to maintain customer‘s satisfaction. Any customer, except those cases deliberated by the President, dissatisfied with the Bank‘s decision may lodge an appeal through the Branch or Credit Business Centre within 30days from the date a credit decision is communicated. However, it shall only be once. The RM/Workout Loan Manager shall forward the case to the credit division The appeal proposal shall be recommended by the Credit Appraisal team/expert/officer. 18 November 2024 276  Credit Decision Implementation Contract preparation  Loan and security contracts preparation commences immediately after getting the customer‘s consent for acceptance of the terms and conditions of the credit decision.  The Bank shall have standard loan and mortgage contract formats.  If additional clauses is required, the concerned Legal Adviser collaboration with the Credit Operation team prepares and/or designs tailor made contracts as per the terms and conditions of the credit decision. 18 November 2024 277 Credit Decision Implementation… Contract Registration  Security contracts signed between the Bank and customer shall be registered with the authorized government organ.  The Credit Administrator is responsible for effecting the registration of the security contracts and collecting them. The Bank‘s Legal Adviser/Officer shall be responsible for confirming the registration of the security contracts at the appropriate governmental office. 18 November 2024 278 Credit Decision Implementation Insurance Before disbursement of the loan, the Bank shall secure appropriate insurance policies for all insurable collateral where the Bank is explicitly included as first and co- beneficiary. Insurable collateral includes: buildings, houses, motor vehicles, merchandises, corporeal elements of business mortgage, machinery, agricultural plantation and produces, etc. 18 November 2024 279 Credit Decision Implementation Insurance The Bank requires the borrower to purchase insurance policies as appropriate based on the collateral type and nature as per the bank procedure. Every acceptable property/document that are held as collateral by the Bank and required to be insured by appropriate Insurance Company shall have 100% insurance coverage before effecting loan disbursement. 11/18/2024 Loan Disbursement Loan/credit facility shall be disbursed after proper execution of all loan contracts, security documents and insurance policies by the Credit Operation Team Disbursement shall be made strictly in accordance with the disbursement terms and conditions specified in the credit decision 281 Loan Disbursement… Credit Operation Expert/Officer as an in putter shall originate facility limit setting, disbursement and the Director/Manager-Credit Operation/Credit Operation Expert (at head office) or the District Manager- Credit/Team Leader-Credit Operation is responsible to authorize the transactions made by the in putter. 11/18/2024 Loan Disbursement… Disbursement Modalities (for working capital term loan)…  If the raw-material or goods are to be imported from abroad, the loan shall be disbursed for opening and settlement of L/C opened at any bank; 283 Loan Disbursement… Disbursement Modalities for Project Term Loan:  The project financing structure and disbursement modalities shall be made considering the smooth implementation of the project and in a way to ensure commitments of the promoter.  In doing so, credit performers shall properly assess the sources of equity financing and schedule disbursements of the loan on a phase-by-phase basis or at a time along with the equity contributions of the promoter 284 Loan Disbursement… Disbursement Modalities for Project Term Loan…  The phase-by-phase loan disbursement shall be conducted as per the fulfillment of terms and conditions of the credit approval.  However, if there is a variation from the credit decision above 5%, the disbursement request of the customer shall be deliberated by the appropriate Credit Approving Team. 285 Loan and Security File Management Documentation The respective Credit Business Centers are required to maintain two types of files for each lending relationship: a Credit File and a Safe Custody File Credit File is the file that contains all lending-related documents plus lending related correspondence. The respective Credit Administrator shall ensure that the customer‘s file contains the loan documents described under the Credit File Documentation Checklist. 18 November 2024 286 Documentation… Safe Custody File is the file that contains all legal and collateral-related documents. Before documents are kept in safe custody, their completeness and legality shall be confirmed by the respective Legal Adviser/Officer. 11/18/2024 Documentation… The Credit Administrator or Property Administrator should ensure that the following recent documents should be located in the left hand side of the credit file: Customers Credit-Risk Rate/Grade Worksheet and Action Plans; Range of Account/Overdraft Utilization Form; Bad Debt Review Form for NPLs; and Documentations Checklist. 18 November 2024 288 Credit File-Pruning The Credit Administrator or Property Administrator is responsible to undertake credit file pruning on a regular basis to assist proper file storage requirements and easy access to the current information. When a credit file is considered bulky and requires pruning, all correspondence and reports over the last twelve-month period (the period can be reduced when the file is still considered to be bulky) should be transferred to the old credit file before the new credit file is created. The Credit Administrator is also responsible to maintain the last credit application and the LAF, with related annexes, are on the new credit file. 18 November 2024 289 Credit File-Pruning… The Credit Administrator or Property Administrator as the case may be must maintain a central index card of all stored credit files in a numerical order. A central index card should contain the storage number, the customer‘s name, and the date of the credit file pruning and the dates covered. When the loan account is closed, Credit Administrator or Property Administrator as the case may be must complete an index card with the following information: Customer‘s name and address, Number of relevant files; Period covered; Date last account closed; and Storage numbers allocated to the closed file. 18 November 2024 290 Loan Files Dispatch Procedure To keep track of the movement of the loan documents and establish responsibility for their security, all exchanges of the loan documents between teams or within teams shall be strictly made through the Credit Administrator or Property Administrator as the case may be, using the document dispatch system of the Bank. All credit files of borrowers must contain a list of all the original documents received and retained and copy of security documents. 18 November 2024 291  PART IX PRE-DELINQUENTLOAN FOLLOW UP AND COLLECTION Discuss on: What do we mean by (regular) follow up? Why? Who is responsible for it? What are early warning signals? Give examples? Why identification of early warning signals? Discuss about the various types of credit follow up? What is asset classification as per the NBE directive no. SBB/69/2018? The Need for Regular Loan Follow-Up A loan granted on the basis of sound analysis/appraisal might go bad because the borrower may not meet his/her/its obligations per the terms and conditions of the loan contract. It is for this reason that proper follow up and monitoring is essential. Therefore, in the follow-up function, the Bank shall Ensure compliance with terms and conditions; Ensure end use of funds; Monitor performance to check continued viability of operations; Detect deviations from terms of decision; The Need for Regular Loan Follow-Up… Make periodic assessment of the health of the loans and advances by noting some of the key indicators of performance Ultimately ensure recovery of the installments of the principal and interest in case of term loan as per the scheduled repayment program, and Identify early warning signals, if any, and initiate remedial measures thereby averting loss from possible default. Early Warning Signals in Regular Loan Follow-UP Since the ‘Know Your Customer´ principle needs constant updating, proactive management of credit risk before serious problems arise is the hallmark of credit monitoring. The CRM has to use internal data, credit database, external data, as appropriate. As such the CRM ought to be alert to some of the following signals/adverse developments, among others: Deterioration in the key financial indicators of the borrower as observed from the financial statements. Decline in credit ratings. Early Warning Signals…  Lack of commitment on the part of management;  Instability in the specific industry;  Diversion of end use of loans; Deviations from terms and conditions including repayments;  Failure of OD to show credit balance as required, delay in settlement of LCs; Failure to keep terms and condition of LGs;  Key management & key personnel turnover; Labor union conflict;  Writing -off substantial amount of receivables; Early Warning Signals in Regular Loan Follow-UP... Frequently bouncing of cheques, Tax evasions; Any legal proceedings against the borrower; Suspicion of fraud; Deterioration in financial performances of associates and/or subsidiaries; Critical observations in the external auditor‘s report and Other indicatives. The se are some of the triggering factors for closer follow- up and taking appropriate measures. Regular Loan Follow-Up 1. The CRM is principally responsible for regular loan follow- up on a case-by-case basis. 2. For branches located within 30 km from the center, all types of follow up shall be done by the CRM. 3. For branches located beyond 30 km from the center, follow up shall be done by the Branch. CRM shall be responsible for bulk follow up. Regular Loan Follow-Up… In case of loans granted in the form of facility such as Overdraft, Letter of Credit, Pre-shipment export credit, the CRM should confirm on a quarterly basis that, the facilities shall continue until the specified renewal period. Otherwise he/she shall forward to concerned approving team for deliberation. Types of Regular Loan Follow-Up Physical Follow-Up Financial Follow-Up, and Legal Follow-Up Regular Loan Follow-Up… Physical follow up existence and operation of the business, status of collateral properties, correctness of declared financial data, quality of goods, labor situation, change in management set up, etc Financial follow-up end use is according to stated purpose pay directly to third parties/designated Account and financial statements analysis Regular Loan Follow-Up… Legal Follow-Up proper documentation and keeping them alive, registration and follow up of insurances. Whether contracts are properly executed by appropriate persons and documents are complete in all aspects. Obtaining revival letters in time Ensuring loan/mortgage contracts are updated timely. Examining regulatory directives, laws, third parties claim, etc Follow up for project loans Follow-up during implementation stage; and Follow-up after commencement of production. Asset classification-Directive No. SBB/69/2018 Pass – Loans and advances in this category are fully protected by the current financial and paying capacity of the borrower and are not subject to criticism. Special mention Loans and advances with pre-established repayment programs past due 30 days or more but less than 90 days. Asset classification-Directive… Substandard Loans/advance with pre-established repayment programs past due 90 days or more but less than 180 days Doubtful Loans/advance with pre-established repayment programs past due 180 days or more but less than 360 days Loss: Loans/advance with pre-established repayment programs past due 360 days or more. 11/18/2024  PART X CREDIT MONITORING Activities “Lending is the principal business activity and the common source of risks for most commercial banks?” Agree/Disagree? Why? How can we effectively manage of the loan portfolio and the credit function? What is credit portfolio and its concentration? What is credit monitoring and its purpose? Whose responsibility is it? Discuss what is credit review, its objectives and types. What and why is loan provisioning? Its reporting?  Credit Monitoring Lending is the principal business activity for banks. The loan portfolio is typically the largest asset and the predominant source of risk. Effective management of the loan portfolio is fundamental. Effective credit risk selection is vital to maintain favourable credit quality. CMPM department can obtain early indications of increasing risk by taking a more comprehensive view of the loan portfolio. Credit portfolio concentration It refers to the collection/size of bank’s investments in a variety of categories. Setting and maintaining concentration limit is critical part of credit portfolio management. Such analysis is conducted with a view to avoiding or correcting undue concentration and the risks associated with it. Credit Monitoring The day-to-day and/or periodic checking, analysis and reporting of the proper implementation of credit decisions as well as the Credit Policy and Procedure to ensure that the credit function of the Bank is executed as planned and structured. The objectives of credit monitoring are to: Ensure the proper execution of credit decisions; and Assess the borrower’s financial and business standing; Minimize losses arising from NPLs; Ensure that the Bank’s Credit Policy and Procedure, guidelines, circulars, memoranda and directives are properly implemented; 11/18/2024 Responsibility for Credit Monitoring The CMPM Department shall be the primarily responsible organ of coordinating and guiding the entire credit monitoring and review function of: Head Office Credit Management and Appraisal Units; District Directors, Credit Management and Appraisal Managers, Customer Relationship Managers and Credit-Monitoring Officers Credit Approving Teams; and Branch Manager and Customer Relationship Officers shall be responsible for doing follow-up on a regular basis on the status of each loan of the lending branch. 11/18/2024 Credit Review A credit review is an integral part of credit monitoring. Re-examination of a customer’s loan cases at an established interval in order to discover the existence changes in the creditworthiness of the customer. It also refers to the investigation and review of loan approvals by various credit committees. It also involves review of the statuses of portfolios and identification of gaps. Credit Review… The major objectives of the review process are: Early identification of emerging problems; Checking the use of loan proceeds; Assessment of the business condition of the borrower; Verification of documentation and compliance with the Bank’s policy and regulatory directives; and Reassessment of the quality and proper registration of collateral. 1. Case-by-case(name-by- name)review It is exercised to ensure that: The repayment of the loan is according to the approved repayment structure; The conditions attached to the loan are properly fulfilled as agreed; The performance meets the account plan; and The credit risk-rating has improved or has at least maintained its previous status. 11/18/2024 2. Portfolio review This is a form of credit-monitoring used to examine the credit concentration of the credit portfolio with respect to various categories such as Economic sectors, Ownership, Loan status (portfolio quality), Tenure, Products, Geography, etc. 11/18/2024  3. Lending authorities decision review This is used to evaluate the volume of loss inflicted on the Bank as a result of poor credit decision and thereby attaches the concept of accountability. The result of such a review could be cancellation of decision authority, change of the composition of the approving committee, or decrease of the authority limit, as the case may be. 11/18/2024  Provisioning for loan loss accounts It is a balance sheet valuation account established through charges to provision expense in the income statement in respect of possible losses in the loans or advances portfolio. The NBE sets minimum provisioning requirement where banks should comply with and report same to it on quarterly basis. The CMPM department through its IFRS and Provisioning Team shall prepare quarterly report and forward to NBE, Board of Directors and top management of the Bank. Classification Category ---Minimum provision: 1. “Pass” ----------------------------1% 2. “Special Mention” ----------------3% 3. “Substandard” -------------------20% 4. “Doubtful” -----------------------50% 5. “Loss” ---------------------------100%  PART XI PROBLEM LOAN MANAGEMENT Activity Points What is an NPL? What are the classifications of NPL? Discuss about NPL Management Strategies? Negotiation points and/or options for amicable resolutions? Interest on NPLs? Why legal proceedings (litigation and foreclosure)? What does loan write-off mean and how does it work? Is it possible to reinstate a written-off case? Meaning of Non-performing Loans (NPL)  Loans and advances whose credit quality has deteriorated.  Principal and /or interest is due and uncollected for 90 consecutive days or more beyond the scheduled payment date or maturity Causes of Non-performing Loans (NPL) 1. External Factors:  Business cycle: The expansion phase of the economy is characterized by a relatively low number of NPLs. However as the booming period continues, credit is extended to lower-quality debtors and subsequently, when the recession phase sets in, NPLs increase.  Unemployment rate: Increases in unemployment may signal a decrease production as a consequence of a drop in effective demand. This may lead to a decrease in revenues and a fragile debt condition. Causes of Non-performing Loans (NPL) 1. External Factors:…  Macroeconomic instability (Inflation, interest rate, Exchange rate etc):The probability that firms will make losses rise; as does the probability that they will earn windfall profits.  Political,Social  Technological  Environmental(ecological)  Legal etc. Causes of Non-performing Loans (NPL) 2. Internal/ Bank Specific Factors  Rapid credit growth: Excessive lending explains loan loss rate  High interest rate: Inappropriate loan pricing (For Banks changing differentiated interest rate), High interest rate impairs Business profitability  Lenient Credit Terms: Terms and conditions set during loan sanctioning has the detrimental factors. Credit managers reacted to competition from other bankers and that this competition might have encouraged a weaker lending standard that leads to loan defaults Causes of Non-performing Loans (NPL) 2. Internal/ Bank Specific Factors Lack of proper skill amongst loan officials, speedy process of evaluating loans mainly due to external pressure, are among the factors that lead to huge concentration non performing loans. Bank size: Small banks prefer to lend to small firms that lack hard financial data to support the lending decision and riskier to the extent that the failure rates of small businesses are higher than those of larger, established Causes of Non-performing Loans (NPL) 2. Internal/ Bank Specific Factors  Poor loan follow up (Monitoring): Some of the loans defaults ascribe to lower level of attention given to borrowers. More banks lose money because they do not monitor their borrower’s property, and fail to recognize warning signs early enough.  Poor Risk Assessment: Risk, and the ways, in which it can be identified, quantified and minimized, is key concerns for a bank’s management etc. Non-performing Loans Management Strategies As per the NBE directive SBB/69/2018 a bank shall establish loan workout and recovery team to manage the NPLs. Non-performing Loans Management Strategies Amicable Resolution(workout) Legal Proceedings Write off and Post write off follow up Amicable Resolution (Loan workout) It is undertaken provided recovery is found promising Loan Workout Negotiation Points: The borrower’s/guarantor’s proposal for repaying his/her/its debt; Source and capacity of repayment (down payment and periodic repayments); Settlement conditions; Collateral; Tenure/duration of restructuring or rescheduling a loan; Additional covenants, if any, etc. Amicable Resolution (Loan workout)… Options for Amicable Resolution( Loan workout) Restructuring- changing the tenure and mode of repayment Securing additional collateral/change of collateral including a personal guarantee by owners/shareholders; Cross-collateralizing multiple loans; Voluntary liquidation of collateral already held; Sellout/buyout of loan to/from other banks; Changing the form of loan partially or fully; Transfer of the loan to another potential borrower; Enforcing additional conditions/covenants; Amicable Resolution (Loan workout)… Options for Amicable Resolution( Loan workout)…  Voluntary sale of other assets for loan repayment;  Replacement or improvement of the management;  Assigning a co-manager or a controlling staff;  Reduction of overdraft to a lower limit; and  Approve additional finance if there are appropriate and concrete justifiable reasons. Amicable Resolution (Loan workout)… While using the above options, it is mandatory to confirm the eligibility of the case per relevant directives of the regulatory body and policy and procedure of the Bank, for such consideration; NBE directive SBB/69/2018 states that a bank shall not renegotiate short or medium term loans and advances to a borrower for more than 5 iterations and long term loans and advances for more than 6 iterations. Amicable Resolution (Loan workout)… The manner of collection of interest and/or principal in arrears by the bank and issues related to grace period shall also be part of the renegotiation between the bank and the borrower depending on specific circumstances of the loan and capacity of the borrower A bank may extend additional loans and advances to a borrower who defaulted from own bank with a view to rehabilitate loans and advances  Application of Penalty Rate on NPLs The Bank charges an additional penalty rate of 3% as soon as a loan account turns non-performing. The 3% penalty rate shall be waived for a restructured/ rescheduled loan immediately even though it is still in NPL category. Re-Transfer of Regularized Loans Cases shall be transferred back to the CRM where the customer’s business is believed to generate sustainable cash flow to warrant full settlement of the debt and fulfills the relevant NBE directive. Legal Proceedings (Foreclosure or Litigation) It is not always possible to resolve cases in a positive manner. Hence, if no mutual agreement is reached to the better, legal proceedings will come to the picture: Legal process can be executed under any of the following mechanisms: When the loan is not recoverable through amicable means; When the concerned approving team decides on transfer of loan cases to legal process after exhausting other settlement alternatives. Write Off  Part/all of the outstanding debt is uncovered from proceeds through the legal process and other all means, proposal will be presented for temporary removal of the uncollectible outstanding principal balance (write-off) from the Bank’s balance sheet:  The property found in the name of the borrower/guarantor, their spouses or the collateralized property is proved not to cover the loan fully; and  After having ascertained that there is no other attachable property to cover the remaining balance fully or partially. Reasons for Proposing Write-Off Absence of property Insolvency Bankruptcy Higher cost of recovery than the realizable value of the property Defects in documentation Court judgment against the bank Elapse of statutory period Post Write Off follow-up Post write off follow-up will proceed to further exploit unforeseen opportunities, to recover the loan; Finally, Draw lesson and compile data for future consumption as input to avoid similar experience. 11/18/2024 Thank you!