training

1. OVERVIEW OF TRADE FINANCE
PRODUCTS
An approvers perspective
PREPARED BY - CREDIT RISK DEPARTMENT

2. DEFINITION
o Credit is value
o Credit is a promise.
o Credit is debt.
o Credit is lending.
o Lending is giving money out and expecting the same to be paid
back.
o Lending is not a donation.
CREDIT

3. TYPES OF CREDIT
CASH CREDIT
These are credit facilities which actually have cash proceeds.
o Term loan
o Overdraft
o Bill Discounting
CREDIT

4. TYPES OF CREDIT
NON CASH CREDIT
These are credit facilities which do not involve cash proceeds.
Rather, cash generation or utilization is contingent during the
period before their maturity or crystallization.
The borrower will also not be the beneficiary of cash proceeds
upon crystallization or maturity of the facilities.
Instead the beneficiaries are third parties who provide the
customers with services, goods or opportunities. They include:
– Letters of Credit
– Guarantees, Performance Bonds and Bid Bonds
CREDIT

5. OVERVIEW OF FUNDED PRODUCTS
CREDIT PRODUCTS
2.1 TERM LOANS
o Lending by banks for specific amounts with specified
repayment schedules.
o Term loans are the basic vanilla commercial loan.
o Typically carry periodic repayment schedules and include a set
maturity date. They are ideal for financing needs that will not
necessarily give the borrower an immediate return or
immediate desired level of cash flows.

6. OVERVIEW OF FUNDED PRODUCTS
CREDIT PRODUCTS
2.2 ASSET FINANCE
Financing for the purchase of assets in exchange for a security
interest in those assets. The most common kind of asset financing
is to extend loans to purchase vehicles, machinery and equipment.

7. OVERVIEW OF FUNDED PRODUCTS
CREDIT PRODUCTS
2.3 OVERDRAFTS
o Overdraft financing occurs when customers make payments
from their current accounts exceeding the available cash
balance.
o An overdraft facility enables the customer to obtain short-term
funding.
o The amount lent is repayable on demand by the bank.
o Overdrafts are generally meant to cover short-term financing
requirements - they are not generally meant to provide a
permanent source of finance

8. OVERVIEW OF TRADE FINANCE PRODUCTS
CREDIT PRODUCTS
3.0 GUARANTEES/BONDS
o A guarantee is an undertaking issued by a bank to pay on behalf
of its customer to a third party such amounts as are defined in
the contractual documents should the customer fail to meet
the matured contractual obligations.
o Usually the guaranteed amount will be paid upon the
beneficiary calling the guarantee without the Bank needing
proof of breach of contractual obligations.

9. OVERVIEW OF TRADE FINANCE PRODUCTS
CREDIT PRODUCTS
3.1 TYPES OF Guarantees
i. Tender/Bid Bonds
ii. Performance Bonds
iii. Advance Payment Guarantee
iv. Retention Bonds
v. Shipping Guarantee
vi. Customs Bonds
vii. Security/Immigration Bonds
viii. Credit/Facility Guarantees

10. OVERVIEW OF TRADE FINANCE PRODUCTS
RELATED CREDIT PRODUCTS
4.0 LPO Financing
LPO Financing refers to advances against Local Purchase Orders
that Bank customers will have received from buyers found
acceptable to the Bank to supply certain goods. This product is a
solution to suppliers who will usually have adequate technical
capacity or experience to supply but have insufficient own funds
to service supply orders.

11. OVERVIEW OF TRADE FINANCE PRODUCTS
RELATED CREDIT PRODUCTS
4.1 Invoice Discounting
Invoice discounting refers to extending advances to suppliers
holding genuine and verified copies of invoices for goods/services
that they will already have issues to buyers found acceptable to
the Bank.
The advances will be equivalent to discounted value of the
invoices. The advances are geared to unlock cash flows tied with
the buyers to allow the suppliers continue to take advantage of
other business opportunities.

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45 - INITIAL PROSPECTS CONTACTED
40 - PRESENTATIONS TO PROSPECTS WHO ALLOW
OPPORTUNITY
35 - PROSPECTS WHO AGREE TO MAKE
APPLICATIONS
30 - APPLICATIONS COMPLETE WITH
REQUIREMENTS
25 - PROSPECTS SUCCESSFULLY APPRAISED AND
RECOMMENDED
23 - APPROVALS
22 - PROSPECT WHO MET APPROVAL
CONDITIONS
20 - DISBURSEMENTS
1. PROSPECTING FOR CUSTOMER/INTRODUCTION OF THE CUSTOMER
CREDIT PROCESS

13. CREDIT PROCESS
APPRAISAL
Risk Analysis
Internally we have translated the principles of good lending and criteria
into the following considerations that must be made in the process of
credit risk analysis.

14. CREDIT PROCESS
Risk Analysis
 Ownership/reputation/KYC
 Management
 Business
 Industry
 Financial Performance
 Ability to pay
 Track Record
 Security

15. CREDIT PROCESS
Risk Analysis
 In the appraisal the purpose must be clearly stated and linked
with the customer’s business and source of repayment.
 Avoid terminologies such as ‘Working Capital’. This is not
descriptive and will render interpretations leading to decisions
that are not necessarily beneficial to the customer.

16. PRINCIPLES OF GOOD LENDING
 These are the considerations that should be taken into account to
arrive at good lending.
 The following considerations about the potential borrower should be
made:

17. PRINCIPLES OF GOOD LENDING
I.GENERAL LENDING PRINCIPLES
 A lender does lend money and does not give it
away.
 Lenders must seek to arrive at an objective
decision.
 The approach of the true professional is to resist
outside pressures and to insist on sufficient time
and information to understand and evaluate the
application.

18. PRINCIPLES OF GOOD LENDING
II. PROFESSIONAL LENDING PRINCIPLES
 Take time to reach a decision. Detailed financial information
takes time to absorb. If possible, it is preferable to get the
paperwork before the interview, so that it can be assessed and
any queries identified.
 The time taken must however leave the Bank competitive with
regards to the speed with which customer’s applications are
decided and feedback given to the customer. Therefore it is
important for the lender to be equipped with all that is
necessary to facilitate analysis as well as make a decision.

19. PRINCIPLES OF GOOD LENDING
II. PROFESSIONAL LENDING PRINCIPLES
 Do not be too proud to ask for a second opinion-some of the
smallest lending decisions can be the hardest.
 Get full information from the customer and not make
unnecessary assumptions or ‘fill in’ missing details.
 Do not take a customer’s statements at face value and ask for
evidence that will provide independent corroboration.
 Distinguish between facts, estimates and opinions when
forming a judgment.
 Think again when the ‘gut reaction’ suggests caution, even
though the factual assessment looks satisfactory. Go back and
test what your gut feels.

20. PRINCIPLES OF GOOD LENDING
III. CREDIT RISK ASSESSMENT
 When dealing with people, it is almost impossible to predict
how someone will behave in the future. It is important
therefore that lenders exercise sound judgment while
granting loans.
 Lending principles help make sound judgments. Note
Principles are not laws that must hold whatever the case.
Rather, they serve as a framework within which to make a
decision.
 The purpose of any credit assessment or analysis is the
measurement of credit risk. Borrowers’ credit assessment is
done using certain criteria, which reflect different
perspectives of assessment and are popularly summarised as
CAMPARI, 5 Cs of lending, etc.

21. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
CAMPARI
Character
 Consider whether the customer can be trusted or is dependable
either willingly or unwillingly. Consider their track record e.g. of
repayment, previous projections and actual performance versus
current claims, record in the activity we are funding, etc.
 We can also consider personal/internal circumstances of the
customer that may affect their source of income or repayment

22. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
CAMPARI
Ability
 Does the customer possess the potential to manage business
well enough for continued success and repayment?
 Consider whether there exists a good spread of skill and
experience amongst whoever is managing the business and the
commitment of this management to see the company’s success
and survival. Where the facility is for a specific activity consider
whether the person managing the business has the necessary
exposure in what we are financing.
 The customer should also possess a reasonable stake in the
business. This confirms his ability to handle funding of the
business in the form of the facility sought.

23. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
CAMPARI
Margin
 Firstly the Bank must earn from the lending to reflect the risk involved
in lending.
 Secondly it should not be forgotten that the Bank is in business to
make profits and give shareholders a fair return on their capital. This
return should reflect their investment.

24. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
CAMPARI
Purpose
 The lender must verify that the purpose is acceptable. The
facility should be in the best interest of the customer as
customers may tend to overlook the implications of borrowing
and the Bank can bring realism to the proposal at the outset,
which may be more beneficial than agreeing to the facility
sought.

25. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
CAMPARI
Amount
 The appraiser must determine whether the amount sought is
adequate i.e. not too much or too little for the purpose. Too
little funding will not meet the customer’s purpose while excess
funding will result in wastage of the excess.
 The amount requested should be in proportion the customer’s
resources and contribution where required. Where required
contribution shows the customer’s commitment.

26. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
CAMPARI
Repayment
 The real risk will be determined from analysis of repayment
ability.
 The source of repayment must be made clear from the outset
and the appraiser must ascertain that the promised funds will
be realized and received.
 The financial reports of the source of income will help
determine ability to pay. In addition the projections will be
required to ensure that there are surplus funds to cover
repayment after meeting core obligations.

27. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
CAMPARI
Insurance
This refers to security. Ideally security should not be a key
consideration of whether to lend or not to lend. However,
security must be acceptable. Acceptable means:
1. Adequate
2. Saleable/Realizable
3. Not Prone to Wastage-
4. Easily Realizable (Shares Vs Land Vs Cash)

28. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
5 Cs OF LENDING
Character
 Character is the sum total of the qualities of honesty, integrity,
morality and so on.
 Character is perhaps the most important and at time the most difficult
criterion to assess.
 Character assessment involves collecting information about the
borrower’s track record of integrity, repayment ability and spending
habits.

29. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
5 Cs OF LENDING
Character
Means of gathering information
 Credit check of internal bank records or other financial institution
 Contact of applicant’s employers and seek information about the
employee
 Documentary evidence such as salary statements, drivers license, utility
bill
 Confidential reports from credit rating agencies are another source.
Character assessment in relation to businesses
 Involves assessing the character of the business owners or, in the case of
companies, the members of the board.

30. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
5 Cs OF LENDING
Capital
Capital refers to the contribution that the borrower proposes to make in
the total investment or business. An investment is usually financed partly
by bank loan and partly by the capital contribution of the owner. The
greater the owners’ contribution to a project the greater is the lenders
confidence in the venture. Borrowers should be able to meet the margin
of capital that a bank finds comfortable.

31. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
5 Cs OF LENDING
Capacity
 Capacity is the ability to repay the loan together with interest as per
the pre-determined schedule. It is about the primary source from
which repayment is expected to take place, which should be
determined from the outset.
 A borrower’s capacity depends on two factors: the borrower’s financial
position i.e. soundness and the borrower’s ability to generate
sufficient net income to service the loan repayment.

32. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
5 Cs OF LENDING
Collateral
Collateral is the secondary source of repayment. When a loan cannot be
paid out of primary source, lenders usually take possession of collateral
and dispose of it and use the proceeds to set off the outstanding loan
amount.

33. PRINCIPLES OF GOOD LENDING
CRITERIA FOR CREDIT ASSESSMENT
5 Cs OF LENDING
Collateral
 A good security should possess these qualities:
 The price of the security should be stable, or not subject to wide
fluctuations.
 The marketability of the security should be rated good.
 The security should be easily valued.
 The security should not deteriorate rapidly over time.

34. EXTERNAL CONDITIONS INTERNAL CONDITIONS
Economy Lending policies
Industry Lending budget
Threat of war Availability of expert staff to monitor loan
Political instability Expansion of lending to certain segments
Crime
CRITERIA FOR CREDIT ASSESSMENT
5 Cs OF LENDING
Conditions
An analysis of conditions covers external and internal factors. It also
covers the conditions and terms of the loan. The riskier the advance, the
stricter the terms and conditions should be.

35. FRAUD IN LENDING
Instances when Fraud in lending occurs;
 Cooked information e.g. financials provided by the
customer
 Forged documents e.g. bank statements, pay slips,
invoices, Securities , Identity documents .etc provided by
the customer
 Figures cooked by the appraising officer e.g. financials,
Score Sheet spread, account statistics e.t.c
 False information on the customer by the appraiser e.g. on
description of customer’s activities, source of income, call
report, and general information on the proposal for
lending.

36. FRAUD IN LENDING
Implications of actions that constitute fraud in lending
 Lending to a customer who has no ability to pay and therefore
eventual default
 Lending to a customer who has no willingness to pay and therefore
immediate default
 Exposure of the Bank to risks that could have been better mitigated
 Lost opportunity for better deserving customers
 Poor reputation of the Bank as one that recklessly takes on undue
risks

37. THANK YOU
ASANTENI