Agenda for Day 2                   Financial & Ratio Analysis                   Subjective Analysis                   Lunc...
The following subjective parameters need to be assessed    Business Risks    Industry Risks    Management Risks    Project...
Business Analysis     Business Risk              • Customer quality and concentration                                • Sup...
Credit proposal should analyse the suppliers and its impact onthe business Details of Suppliers                           ...
Credit proposal should analyse the customers and its impact onthe firm    Details of Customers                            ...
Industry Analysis    Industry Risk                  • Cyclicality of the industry                                   • Seas...
Bank view on major industries that should be disseminated toall officers    Advantages: This enables       Common risk per...
Standardise the Structure and Contents of Typical Industry Reportat Bank; Prioritise reports    Industry reports should en...
Industry Reports should enable officers understand thefollowing key factors    Demand-Supply Scenario    Competitive Posit...
Credit proposal should analyse the supply/ demand scenario ofthe business   What is the current & projected demand supply ...
Credit proposal should analyse the competitive position ofthe firmHow many competitors does the borrower have in the same ...
Credit proposal should analyse the sources of pricevolatility of the product Is it a commodity or branded product ? How ma...
Recommendation - Credit proposal should analyse thecyclicality of the business Is the business cyclical?          Yes     ...
Credit proposal should analyse firm’s dependence onregulatory/fiscal concession   Is the industry dependent on fiscal conc...
Management analysis                                  Character                                     Integrity              ...
Clearly address issues of management competence andreputation    Examine competence of key managerial persons and highligh...
Address the issue of management succession  Succession could be classified as follows     Well-defined succession plan in ...
Comment on the capability and competence of management    Competence could be classified as follows       Management is ex...
Comment on management track record in meeting its commitments    Compliance could be classified as follows       Company h...
Project Analysis                            Status of Project clearances                            Status of Financial Cl...
Conduct of Account - Monitoring parameters                             Number of times lower of DP/ Limit overdrawn       ...
Judgmental and Quantitative Model – What is therelation?      Industry Risk      Financial Risk                           ...
The quantitative model would derive its strength from the Bank’sdata and the human expertise and experience of Credit Offi...
DISCUSSIONS                                      IM aCS 2010                                Printed 11-M ay-11For Classroo...
All the contents of the presentation are confidential andshould not be published, reproduced or circulated without the   w...
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RMPG Learning Series CRM Workshop Day 2 session 2

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RMPG Learning Series CRM Workshop Handouts: File 5 of 9

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RMPG Learning Series CRM Workshop Day 2 session 2

  1. 1. Agenda for Day 2 Financial & Ratio Analysis Subjective Analysis Lunch Break Case Studies Open Session/ Q&A IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 1
  2. 2. The following subjective parameters need to be assessed Business Risks Industry Risks Management Risks Project Risk Conduct of Account IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 2
  3. 3. Business Analysis Business Risk • Customer quality and concentration • Supplier reliability and concentration • Order book position • Competition impact on GP margin • Industrial/employee relations IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 3
  4. 4. Credit proposal should analyse the suppliers and its impact onthe business Details of Suppliers Local Within the State Outside the State Where are they located How many suppliers does the Name Period of Location borrower depend on Association Names of the top three suppliers Terms of Purchase Cash Purchase (%) Credit Purchase (%) Average credit period from suppliers IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 4
  5. 5. Credit proposal should analyse the customers and its impact onthe firm Details of Customers Local Within the Outside the Location of customers State State Terms of sale Cash Sale (%) Credit Sale (%) Average credit period to customers Number of customers Percentage of Credit Name Percentage of sales to top three total sales period customers IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 5
  6. 6. Industry Analysis Industry Risk • Cyclicality of the industry • Seasonality • Regulatory framework (dependence on) • Technology dependence • Environmental impact • Demand-supply situation IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 6
  7. 7. Bank view on major industries that should be disseminated toall officers Advantages: This enables Common risk perception Standardised analysis Requirements: This implies Standardised Report formats Updates to ensure timeliness Dedicated Manpower to enable creation of a bank-wide view IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 7
  8. 8. Standardise the Structure and Contents of Typical Industry Reportat Bank; Prioritise reports Industry reports should enable officers understand key success factors for the industry: Some of the latest reports are fairly detailed and provide a good insight into the industry Suggested Report frequency Main Report: One comprehensive report annually Mid-term Report: One mid year review Flash report: In case of major developments Industry Reports should be prioritised based on Banks existing credit exposure Lending proposals in hand Banks existing NPA exposure to be restructured IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 8
  9. 9. Industry Reports should enable officers understand thefollowing key factors Demand-Supply Scenario Competitive Position of the borrower Sources of Price Volatility Cyclical nature of the industry Terms of Trade Suppliers Customers Regulatory/ Fiscal Environment IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 9
  10. 10. Credit proposal should analyse the supply/ demand scenario ofthe business What is the current & projected demand supply position of the product? Is demand/ supply seasonal? What is the demand supply situation in international market? What are factors which affect the demand supply situation of the product? How these factors are likely to change in near future? IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 10
  11. 11. Credit proposal should analyse the competitive position ofthe firmHow many competitors does the borrower have in the same geographical area of operationHow does the borrower rank vis-à-vis the competitors Strong Average Below AverageIs oversupply likely to affect margins Yes No SometimesHow aggressive is competition? High LowWhat are the chances that the business will fail due to inability of the borrower to sell the goods? High Low IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 11
  12. 12. Credit proposal should analyse the sources of pricevolatility of the product Is it a commodity or branded product ? How many players are in the market and what is the market concentration ? What is the price relationship between international & domestic markets? What is price volatility in international/domestic markets ? IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 12
  13. 13. Recommendation - Credit proposal should analyse thecyclicality of the business Is the business cyclical? Yes No How volatile is the cycle? High Moderate Low What is the current stage of the business cycle? Ascending Peak Descending IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 13
  14. 14. Credit proposal should analyse firm’s dependence onregulatory/fiscal concession Is the industry dependent on fiscal concessions? Is any change expected in the government policy? What will be the impact on the borrower due to such changes? IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 14
  15. 15. Management analysis Character Integrity Business Commitment Credit Track Record Capability Financial Strength CompetenceManagement Risk Business Experience Firm’s age Reputation with customers/suppliers Organisation Internal Control Employee relations / Quality Succession Planning IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 15
  16. 16. Clearly address issues of management competence andreputation Examine competence of key managerial persons and highlight changes in management, if any – Do the key managerial persons have adequate qualifications and experience to manage their responsibilities? – Has the management changed? What is the impact of such change? Market knowledge on borrower: For independent reports, it is important to mention the connection of informer with the applicant – What is the relationship of the informer with the applicant? • Customer, supplier, lender, competitor For associates, opinion of other banks should be taken – Is the account performance of associates satisfactory? IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 16
  17. 17. Address the issue of management succession Succession could be classified as follows Well-defined succession plan in place; business not dependent on one person Business dependent on one person at present, but in the event of incapacitation of that person a good succession plan is in place Succession is not addressed adequately and hence dealing with a change in the management team could adversely affect the company’s performance; however the damages can be contained Succession has not been addressed and in the event of incapacitation of the key person, the business would suffer financial setbacks Current management is strong, but any change would impair loan repayment. This selection requires further explanation in Independent report to justify credit extension. IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 17
  18. 18. Comment on the capability and competence of management Competence could be classified as follows Management is exceptional. Tasks are consistently performed in an efficient and effective manner. Management is very good. Person is well organised and knowledgeable about the company and the industry in which he operates Person has generally acceptable management skills but weakness in one or two critical areas is evident. Tasks are generally performed satisfactorily. Person exhibits limited managerial qualifications. Individual is not decisive and does not have a clear understanding of the company or its industry. Person exhibits a total lack of skill. Decisions are illogical and loan repayment could be at risk. IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 18
  19. 19. Comment on management track record in meeting its commitments Compliance could be classified as follows Company has never violated any term and condition of its loan agreement Company rarely does not meet all terms and conditions of its loan agreement Company meets all major loan covenants but from time to time may fail to comply with minor ones Now and then the company breaches a significant term or condition of the credit agreement Company consistently violates loan agreement covenants IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 19
  20. 20. Project Analysis Status of Project clearances Status of Financial Closure Percentage of Project Completion Track record in Project implementation Infrastructure availability Type of construction contract Contractor risk Legal/regulatory environment Market for project outputProject Risk Score Design/technology risk Ability to handle projects in hand Force majeure risk Project DSCR Project IRR Sensitivity analysis IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 20
  21. 21. Conduct of Account - Monitoring parameters Number of times lower of DP/ Limit overdrawn Cumulative number of days lower of DP/ Limit exceeded Number of days interest overdue Number of cheques/ bills payable by the borrower returned Number of LC/BG issued in favour of buyer devolved/invoked Delay in submission of renewal proposal/statements byConduct of Account borrower Variance in projected sales Vs. actual sales Delay in rectification of inspection irregularities by Parameters borrower Delay in compliance with sanction order conditions by borrower. Credit summation/sales- excluding cheques returned Delay in submission of Audited Balance Sheet to Bank IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 21
  22. 22. Judgmental and Quantitative Model – What is therelation? Industry Risk Financial Risk Lending Decision Management Risk Business Risk Project RiskThe Quantitative Risk model would be based on historical data and expert opinionattempt to mimic the credit risk assessment of a credit risk officer IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 22
  23. 23. The quantitative model would derive its strength from the Bank’sdata and the human expertise and experience of Credit Officer Library of explanatory financial variables Based on bank-specific data Statistically explanatory set of variables Calibration & Normalisation “Weights” by statistical techniques IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 23
  24. 24. DISCUSSIONS IM aCS 2010 Printed 11-M ay-11For Classroom discussion only Page 24
  25. 25. All the contents of the presentation are confidential andshould not be published, reproduced or circulated without the written consent of IFC, Bangladesh Bank and IMaCS. IM aCS 2010 Printed 11-M ay-11 For Classroom discussion only Page 25
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