Credit Risk Practices for Business Banking II Flashcards
1
Q
What are the business risks?
A
- Economic cycle success
- Business life cycle
- Suitability of company product to market
- Supply chain risks
- Distribution access
- Distribution influence
- Distribution elasticity
- Divisional management performance
- Number of management/directors
- Key person insurance
- Management/director character
- Management’s/directors’ personal credit record
- Succession plan
- Employee relations
- Level of envionmental risk
- Level of environmental compliance
- Leagle compliance
- Credit compliance breach
- Credit covenant breach
- Business credit reputation
- Business plan success/dealing with catastrophes
- Capital expenditure/technology
2
Q
What does divisional management performance consist of?
A
- Production performance
- Marketing performance
- Finance performance
- HR performance
- IT peformance
3
Q
What risks are associated to Economic cycle success?
A
- Low risk - both long and short term market disturbances are dealt with in an effective and efficient manner. Management reacts quickly and appropriately to adverse cyclical/seasonal trends and, as a result, maintains consistent profitability and cahs flow
- Moderate risk - the business has been able to absorb short term market disturbances inlcuding economic or business swings. However, longer term distrubance could adversely affect the business’s credit worthiness
4
Q
What risks are associated to Business life cycle?
A
- Low risk - the business will be classed as mature where goods or services are provided in a standard format and do not really change. Competition will be intense and gaining market share will be difficult.
- Moderate risk - the business is growing providing goods or services that are better than those provided by their compeititors. This allows them to charge a premium which should result in a higher profit
- High risk - declining business’s will be characterised generally by goods or services which are nearly identical to those of their comptetitors and customer demand is falling
5
Q
What risks are associated to Suitability of company market to product?
A
- Low risk - the products are regarded as staple items for survival such as food, heat, water
- Moderate risk - typically these will be purchases that can be deferred if cash flow becomes tight
- High risk - these products will be considered luxaries, there will often be cheaper alternatives but they will not have the same cachet as the real thing
6
Q
What risks are associated to Supply chain risks?
A
- Low risk - there is no limitation of suppliers; the raw materials and other inputs can be sourced locally; there is no percieved shortage in the next 12 months and there is sufficient reliable transport readily available
- Moderate risk - there is some shortage of suppliers; raw materials, while having to be imported from abroad, are still readily available; some planning is required for the placement and fullfillment of orders
- High risk - suppliers of raw materials can be temporrily unavailable and are always imported from abroad; the price of supplies can fluctuate more than 10%; prices cannot be forecast more than 3 months ahead
7
Q
What risks are associated to distribution access?
A
- Low risk - the ability to access all customers who wish to buy the product or service is easily acheived and without hinderance
- Moderate risk - the ability to access all customers who wish to buy the product or service is mixed. Delivery standards are not entirely within the control of the business which may use sub-contractors for delivery
- High risk - there’re issues regarding accessing all of its customers, delivery is fragmented and the business limited influence on delivery timescales and schedules
8
Q
What risks are associated to distribution influence?
A
- Low risk - the business has complete control over its entire distribution network and ensures there is consistent uniformity in the standard of its products or services, permitting quality assurances to be provided to its customers
- Moderate risk - the business has some control over its distribution network and can exert some influence. It will normally have a mixed range of customers, both direct consumers and whole-salers
- High risk - the business has no control over its distribution network, it is characterised by many suppliers, competing with similar products
9
Q
What risks are associated to distribution elasticity?
A
- Low risk - the links in the distribution chain are few and the business has a number of years to plan ahead for any changes or has the ability to respond quickly to changes in consumer habits
- Moderate risk - there are a number of links in the distribution chain and generally the business has a limited amount of time to plan ahead for changes; or the business may be hampered economically if there is a sudden change in consumer habits
- High risk - there are many links in a distribution chain and at times these can be complicated. Changes occur extremely quickly, consumer habits cannot be forecasted or anticiapted
10
Q
What risks are associated to divisonal management performance?
A
The main divisions are:
- Production
- Marketing
- Finance
- HR
- IT
- Low risk - the division operates consistently to a very high level of efficiency and is held in high regard by its competitors. This also reflects the perfomance of the manager/director responsible for this area
- Moderate risk - the division performs most of the time in an effective, satisfactory and fairly efficient way. This also reflects the performance of the manage/director responsible for this area
- High risk - the performance of the division is inconsistent, it is subject to continous improvement initatives and its peformance is even a drag on the overall business. This also reflects the performance of the manager/director for this area.
11
Q
What risks are associated to number of management/directors?
A
- Low risk - all are filled by different individuals
- Moderate risk - 1 individual is responsible for 2 divisions
- High risk - 1 individual is responsible for 3 or more divisions
12
Q
What risks are associated to key person insurance provision where managers/directors are responsible for 2+ divisions?
A
Key Person Insurance covers long term illness or permanent absence because of death - but not resignations or dismissals. This is where robust succession planning is required.
- Low risk - yes all are covered by full key person insurance for all bank debt levels
- Moderate risk - 2 are covered by less than 50% key person insurance for agreed bank debt levels
- High risk - none are covered by key person insurance
13
Q
What risks are associated to management/director character?
A
- Low risk - all managers/directors are well established members of the community whose integrity is undoubted
- Moderate risk - the management team/directors are all principalled individuals who are sound, professional and respected by their workforce and the community
- High risk - opinions have been expressed that the managers/directors do not always act in a respectable and entirely honest manner
14
Q
What risks are associated to Management’s/directors personal credit record?
A
- Low risk - management/directors are known to pay their personal debt punctually or in advance of the due date
- Moderate risk - management/directors are irregular in the payment of their personal debt obligations
- High risk - management/directors are in default of their personal debt obligations
15
Q
What risks are associated to Succession Plan?
A
- Low risk - the succession plan has been formally prepared and is updated at least biennially
- Moderate risk - the succession plan deals with some key issues but does not address adequately. As a result dealing with a change in the management team could adversely affect the businesses performance
- HIgh risk - some succession issues have been addressed but the plan is narrow in scope and does not provide fully for the major contingencies such as incapacitation of key leaders. The plan is out of date or no written plan is in place.
