The document discusses lending in the banking business and concepts related to insolvency. It begins by outlining the learning outcomes which are to articulate the role of lending, discuss the bank lending cycle, and explain insolvency, bankruptcy, and receivership. It then provides definitions of key terms like insolvency, receivership, and bankruptcy. Finally, it lists 11 signs that can indicate a business or individual is insolvent, such as continuing losses, current liabilities exceeding assets, unpaid taxes, and suppliers requiring cash-on-delivery or special payments. The document aims to explain these lending and insolvency concepts to banking and financial services students.

1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
1
Module 3: Lending

2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
LEARNING OUTCOMES
After completion of this study you should be
able to:
• Articulate the role of lending in the banking business
• Discuss the various aspects of a typical bank lending
cycle and highlight the key issues at each stage
• Explain the meaning of insolvency, bankruptcy and
receivership from the viewpoint of the lender.
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Lending in the Banking Business
General Principles of Good Lending
Types of Advances to Customers
The Practice of Lending
Securities for Advances
Corporate, Retail and Mortgage Lending
MODULE COVERAGE
3
Typical remedies for Defaulting Borrowers
Insolvency, Receivership and its Effects

4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
• Insolvency
Generally, insolvency refers to the inability of an individual or business to pay
their obligations as they fall due. Technical insolvency is a situation in
which a person or a business has more liabilities than assets. It means the
person or organization cannot pay their debts/ liabilities from their assets.
The typical balance sheet of an insolvent concern has more liabilities than
assets, and a negative net worth position.
• Receivership
This is a situation in which the business affairs of an individual or ongoing
business which has failed to or is unable to pay its debts, is put under the
oversight and control of an independent person to run (a receiver). A
receivership is normally the first step to salvage a situation where a
borrower/ debtor’s financial position deteriorates significantly until their
ability to pay the debts is in doubt. The receiver may be appointed by a
court, a consortium of creditors or a single creditor, subject to certain
conditions.
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5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Signs of insolvency
1. Continuing losses
Persistent substantial losses, unless reversed, lead to insolvency. Not every
business that makes a loss, or a series of losses, is insolvent. As long as
working capital is available or new capital can be injected to cover those
losses, insolvency can be avoided.
That is, losses by themselves do not cause insolvency. Rather, insolvency is
usually brought about by a combination of losses and insufficient working
capital.
On the other hand, one large loss or series of losses may disclose a trend
which counters any defense that expected future profits will overcome
what otherwise might be a short term problem, and raises questions on
whether working capital is truly sufficient to absorb those losses.
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6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
2. Current ratio below 1:1
Liquidity is a measure of the extent that liquid assets are available to cover
payable debts. The business's liquidity ratio is a comparison of its current
assets and current liabilities. If the ratio is greater than 1, there are more
current assets than current or payable debts and an indication that the
business should be able to pay those debts from available assets. If the
ratio is less than 1, the opposite applies.
3. Overdue State taxes Is non-payment of tax commitments (whether PAYE,
VAT or corporation tax) a good indicator of insolvency?
The broad answer is, yes. Apart from those who simply do not want to pay,
those disputing tax bills by the Revenue Authority, or those in arrears but
are able and intending to pay later; businesses will normally meet their
obligations to the tax authority. Business owners need to carefully
consider solvency whenever taxes remain unpaid.
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7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
4. Poor relationship with present bank(s), including inability to borrow further.
Banks have a distinct advantage over the other creditors. The bank knows
what funds are on hand and can analyze the flow of funds through the
bank account. If the business has borrowed money from the bank, the
business owners will usually have had to provide financial information
from time to time. Usually none of this information is available to other
creditors. A poor relationship with a bank might be an indicator of
insolvency if it stems from;
• Non-repayment of monies due to the bank
• The bank being placed in a position where it must regularly dishonor
cheques
• The bank's assessment of the deteriorating financial position or
management of the business.
• A strained relationship with a bank does not prove that the customer
is insolvent, just as a good relationship is not proof of solvency.
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8. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
5. No access to alternative finance.
Unwillingness by financial institutions to finance the business, coupled with
the owners’ inability or unwillingness to inject in more fund while the
business is unable to meet is obligation, could indicate insolvency.
6. Inability to raise further equity capital.
An entity is insolvent if it cannot pay its debts as they fall due. The inability to
pay debts is linked directly to the inability to obtain ready cash and to
debts being "due and payable".
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9. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Three financing alternatives are available to businesses in need of cash;
a) 1. The debtor can convert short term debt to long term debt - repayable
at some date in the future or intermittently over that period. If a debt is
no longer 'due and payable' now it does not require cash flow nor will it
form part of a strict solvency calculation.
b) 2. Businesses may borrow funds to pay other due debts. Essentially this is
creating a new debt to pay on old debt. But care must be taken not to
mislead the lender, even if the loan is to satisfy current debt and alleviate
current cash flow problem. The banker should be aware.
c) 3. The debtor can obtain funds in the form of equity capital. Equity, while
seeking an eventual return from profits, does not compete with debt for
repayment
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10. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
7. Suppliers placing the debtor on C.O.D., or otherwise demanding special
payments before resuming supply
If usual on-credit suppliers start demand cash before or one delivery, there
might be signs of insolvency.
8. Piling invoices of creditors unpaid
Individual creditors are the first to know that their invoices are not being paid
on time. An efficient credit manager or business operator will have
systems that identify overdue accounts and prompt collection action. If a
bank’s customers increasingly has invoices that are being unpaid for long
periods without reasonable explanation, there may be signs of insolvency.
9. Issuing of post-dated cheques which later bounce.
The issuing of a post-dated cheque for current debt is one of the classic signs
of insolvency. It is also one of the major signs of hope by both the debtor
and the creditor that the money will be there when the cheque gets
presented.
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11. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
10. Special arrangements with selected creditors
Special arrangements with selected creditors, especially ones under which
creditors accept a fraction of the due amounts for full payment, should
raise suspicion.
11. Solicitors' letters, summon(s), judgments or warrants issued against the
company.
A single letter of demand from a creditor or their solicitor is not proof of
insolvency, as there may be a real dispute between the parties.
A series of demands from a number of solicitors, however, should create a
strong presumption of insolvency. It would be unusual for a business to
have a large number of disputes with their suppliers at the one time.
If the creditor moves beyond the demand stage and obtains a judgment that
remains unpaid, the presumption of insolvency is all but confirmed. When
execution of the judgment is undertaken by the creditor, a state of
insolvency is certain.
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12. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
END
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