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Analysing business risks; introduction


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Lending to businesses is never easy. The assessment of a bank’s risk is complex with a number of issues that have to be considered which are both internal and external to the business. What is often lacking is a clear process to follow in order to systematically assess these issues from a credit risk perspective. In this presentation, we introduce a framework and a process to enable these internal and external business risks to be identified.

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Analysing business risks; introduction

  1. 1. Analysing business risks: An introduction from
  2. 2. How do we define business risks?
  3. 3. Business risks are events that occur in the business environment that may result in unexpected outcomes.
  4. 4. But they can also have a positive impact. For example, the failure of a competitor may result in greater market share for a business. Normally, these events are associated with a negative impact on the business, such as a fall in profits.
  5. 5. So, it’s important for lenders and analysts to take a balanced view and not to look only for the negatives.
  6. 6. Macro- Environment Market- Environment Micro- Environment Business risks occur in three distinct business environments
  7. 7. This is the big, wide world and everything that goes on in it that may affect the business either positively or negatively. These are the things that the business can’t control and so management has to be aware of what’s happening and be able to anticipate the change in the environment and adapt the business’ operations to suit. The macro-environment
  8. 8. This is the marketplace in which the business operates and, obviously, has a direct bearing on its future sustainability. Here the analyst should consider issues such as products, target market, competition, suppliers etc. The market-environment
  9. 9. This is the internal environment of the business and includes an analysis of the experience and quality of management, corporate governance, available resources, labour, and so on. The micro-environment
  10. 10. Because events in these environments can be so varied and the environments themselves so large, we need to take a structured approach to the analysis and apply a process to ensure that we cover all the various possibilities. We use a credit risk management framework……….
  11. 11. MICRO- ENVIRONMENT Management; Credit history Personal characteristics Contractual capacity Management, finance, marketing skills Technical expertise Personal assets and liabilities Able succession plan Resources; Labour Operational capacity Premises Plant & machinery Forex MARKET ENVIRONMENT Product(s) Location Customers Suppliers Competitors Substitutes Seasonality Pipeline business Entry barriers MACRO- ENVIRONMENT Political environment Economic environment Social environment Technological environment Ecological (physical) environment Legal environment Non-Financial Risk or Business Risk
  12. 12. Some analysts will prefer to assess the external environments before looking at the internal factors while others will do the opposite. The important thing is to ensure that all three environments are analysed before moving on to assess the financial risks.
  13. 13. Before embarking on the credit risk framework there are some background questions to be asked when assessing a business…..
  14. 14. Who owns the business? How old is the business? What is the correct name of the borrower and is it a sole proprietorship, partnership or company? Do the owners control the day-to-day running of the business or, if not, are the managers capable, experienced? What does the business do, in what industry is it involved and what is the general health of that industry?
  15. 15. I do hope that you enjoyed this presentation. For more commercial and business banking content, please visit where you can subscribe to the business banking blog, watch the videos or view and download other Slideshare presentations. If you have any questions about this presentation or any other content, please send an email at