The Principles of Lending II Flashcards
Explain repayment capability.
- In any loan agreement the customer must be able to repay the loan in the agreed time span
- The customer must therefore be able to show, based on historical info and, more importantly, with projected figures, that the business can meet interest payments and repay the loan with an adequate margin in case of the unexpected
- Projected, or budgeted figures for income & expenditure, profit projections and cash flow analysis will form the basis of the assessment
Explain terms.
- When you have established that the proposals are viable - that the business can make the proposed interest and loan repayments - then you work with the customer to determine the loan facility that best matches their needs
- For capital expenditure, the term of the loan facility should normally tie in with the expected life of the asset purchased. Extra finance may be required for working capital to support the higher levels of debtors and stock during the working capital cycle
- It may be appropriate to divide the total facility into an overdraft for working capital which’ll fluctuate and a term loan on which there is the discipline of fixed repayments
Explain Security
How should it be valued?
A security is a form of insurance to the bank
It is always prudent to allow a margin for cover with the security taken, in case the security does not fetch the value attached to it when the loan was granted e.g. the value of stocks and shares can fluctuate markedly
What items can typiclly be used as security?
- Legal mortgages over property (standard securities in Scotland)
- Debentures - Fixed/Floating charges (only from companies)
- Guarentees
- Life policies
- Stocks and shares
Explain covenants
The loan agreement may contain obligations on the borrower such as provision of info to the bank and adherence by the customer to financial convenants, such as interest cover maintenance, gearing levels and liquidity ratios.
What should be the nature of any proposition?
It should be able to stand on its own without the need for security
How may a bank acheive remuneration?
Generated from a number of source:
- The difference between interest rates charged to borrowers and that paid to depositors
- Loan arrangement fees
- Charges for the services provided by the bank, such as night safe facilities etc
- Commision and payments recieved from outside agencies for referring clients such as insurance commission
Explain risk vs reward
- It’s not unreasonable for the bank to charge higher rates of interest when it considers that the risks are higher with a particular loan
- Similarly, a lower rate of interest may be applied to a fully secured loan to a customer with a strong performance track record
What should one include in the control of lending?
- Monitoring loan covenants
- Investigating irregular balances
- Involving all members of staff to obtain up-to-date and relevant info on a customer’s affairs
- Undertaking visits to customer’s premises
- Obtaining additional sources of info
What should one consider when looking at irregular balances?
- What is the reason for the irregularity on the account and what steps does the customer intend taking to put the matter right?
- Are we prepared to formally approve the additional lending perhaps for a very short time or possibly over a longer period?
- If we are not prepared to grant further advances, are we prepared to return the customer’s cheques unpaid? Is this possible?
What are additional sources of information?
- Stubbs Gazette
- Local and daily newspapers
- Dun and Bradstreet Registers
- Extel cards
- Information held at the company’s office
What is an irregular balance (irregular position on account?)
- Borrowing in excess of agreed limit - e.g. Hard core borrowing
- Facilities that are overdue for renewal
- Accounts that aren’t fluctuating as expected
- Unusual items passing through the account
