Topic 7: Lending Flashcards
Describes the arrangement made by the banner with its clients to secure credit facilities
Bank Lending
As a result, the borrower must pay interest on the amount borrowed
Bank Lending
Typically offers a way to save extra money to people. The surplus deposits are then made available in loans, advancements, and overdrafts to individuals, cooperation bodies, and business customers
Banks
Banks act as ________________ between the demand sector (which requires credit for financing projects) and the supply sector (which supplies such loan-able money for such investments)
Key Intermediaries
It is an undisputed truth that in commercial banks’ balance sheets, most essential assets are ___________________
loans and advances
What are the largest sources of income from the bank’s standpoint?
loans and advances
What is the importance of bank lending?
- It’s essential to the economy
- It allows the economy to expand and helps every individual
- Consumers would be able to raise their living standards as a result of economic expansion
a multi-step process, where a borrower applies for a loan and the application will be processed by the lender, in this case the bank
Origination
a process in obtaining mortgage/home loans
Origination
The loan origination fee is usually about ___ of the loan
1%
The origination process is overseen by
the Federal Deposit Insurance Corporation
are responsible for managing the loan origination process from application to granting of a loan
Loan Originators
may work for a lender or be independent
Loan Originators
In origination, borrowers must submit various types of _______________ and _________ to a lender including tax returns, payment history, credit card information, and bank balances
financial information and documentation
it is the filling out of a loan application form
Loan Application
this is where the applicant submits documentation to substantiate income, employment and financial status, either during the initial application or after pre-approval
Documents
where the lender verifies the borrower’s credit score whether he is a good payer or not, and determines if the borrower’s income and financial status qualifies for the loan
Screening
Depending on the lender’s approach and the borrower’s financial status, there may be an opportunity to negotiate favorable loan terms
Negotiation
Once the terms are agreed on, the loan application is processed by the lender, going through several departments, such as underwriting and documentation processing
Finalize Loan Application
After final processing, the lender decides to approve or reject the loan application
Loan Approval
- the lender wants to know that you will be able to repay the loan
- you give the lender permission to check your credit history
Capacity to Repay
- when you sign your loan documents, you give the bank permission to establish a lien on any assets you pledge as collateral
- real estate, company assets, equipment, cars, and accounts are some examples
Collateral for Leverage
- the bank also wants to know how much cash you’ve put into your company
- this demonstrates to the bank that you are devoted to developing the business and makes you more appealing as a possible borrower
- if your financial situation is substantially stronger than the business’s, the bank may still proceed with the loan as long as you guarantee it
Capital Holdings
- the history, references, and reputation of your firm all play a role in the decision to issue a loan
- if your firm has a history of debt nonpayment, as well as a bad reputation and poor service, banks may be hesitant to do business with you, even if you fulfill the other conditions
Character or Reputation
- banks look for in loans is beyond the borrower’s control
- even if your company has the necessary capacity and collateral, a bank may decline your loan if you operate in a high-risk industry
- this is not because the loan is wrong in and of itself, but because the industry is prone to a rapid downturn, placing the bank at risk
Conditions of the Market
this is where your application will be determined if it is rejected, accepted, or handed out back to you to discuss some more options
Approval
is the process that is under the approval process, that refers to handling out the pre-approved loan application to the group of experts that digs deep beyond the basic Five C’s and decide whether to lend you or not
Quality Checking
- is the process of pursuing payments of debts owed by individuals or businesses
- collecting payments from the borrower
Collection
- they are the ones in charge of the borrowing and lending that exist in both parties
- they are the one who funds the lender, and they collect payment from the borrower with interest
Financial Intermediaries
Another term for Financial Intermediaries
Middle-Man
it is the management of problem accounts, where early detection plays a major role
Remedial Management
What are the goals of Remedial Management?
● Incorporate monitoring processes to detect when accounts begin to deteriorate.
● To classify problem accounts before they become hardcore delinquent.
● Maximize collection efforts through assigning a specialized unit to manage the recovery process.
a specialized trained and responsible unit for managing the collection and recovery of written-off or hardened accounts in a multi-branch bank
Remedial Management Unit (RMU)
What are the functions of Remedial Management Unit?
● Transfer the responsibility of recovery to a specialized unit that it has trained.
● Responsible solely for the recovery of hardcore delinquent accounts.
What are the responsibilities of RMU?
● Recovering written off accounts from the branches. The RMU relieves branches of uncollectible accounts so that the branch can engage in more productive activities.
● Providing information and analysis of problem accounts. This helps management to formulate and revise credit-granting policies
The staff should also display the ability to be __________ but not __________ in the collection
assertive; abrasive
What is the Remedial Management Process
- Classify Accounts & Recommend to RMU
- Evaluation of Accounts by RMU
- File Transfer
- Pre-collection Preparation
- Collection Process
- Developing Payment Plan
- Creating Incentives
- Internal Control
- Performance Monitoring Reports
➢ Account officers alert MF Supervisor/Branch Manager when an account becomes difficult to collect or “hardened”.
➢ All possible measures are taken in the field to recover the account.
➢ MF Supervisor/Branch Manager evaluate the status of the account.
➢ When collection options are exhausted, microfinance supervisor/branch manager recommends loan write offs to RMU.
Classify Accounts & Recommend to RMU
- This activity is conducted when written-off accounts are endorsed from the branches
- validates each referred account to determine what collection arrangements have been made previously
- status and whereabouts of clients; assets surrendered by clients, if any, and other repayment and credit history
Evaluation of Accounts by RMU
- When accounts are “turned over” to the RMU, the RMU retains full management control of the accounts
- When accounts are “turned over” to the RMU, the RMU retains full management control of the accounts
File Transfer
- The primary activities of the remedial management unit is the process of account identification and classification
- After the written-off accounts are endorsed to the unit, the first activity is to classify the accounts: collectible and/or uncollectible
- involves the review of individual credit folders, including the notes of AOs who handled those accounts and supervisors and branch managers that supervised those accounts and recommended them to the RMU
Pre-collection Preparation
Immediate attention should first be placed on recovery efforts of accounts classified as ___________
collectible
● RMU staff visits borrower with written off or hardened accounts at least twice a month
● RMU staff follows up on collection agreements and propose an approach to recover the account;
● Recovery activities are organized per area to maximize the minimum target of 15-25 clients per Collection Officer.
Collection Process
This process presents payment terms that the bank can consider in restructuring delinquent accounts, and encouraging clients to settle their accounts as soon as possible
Developing Payment Plan
- to motivate staff to collect accounts
- should reflect realistic goals in recovering collectible and uncollectible accounts
Creating Incentives
- The RMU is assigned accounts that have been written off the books of the bank
- Any collection from these accounts goes directly to the bank’s revenues
Internal Control
Why should the bank establish internal control mechanisms?
To protect against fraud
- This involves transferring written-off accounts from the bank’s outstanding portfolio
- This transfer can be automated through the use of the bank’s MIS and/or manually through subsidiary ledgers
Creating a separate loan listing for written-off accounts
__________________ of restructured payment plans with clients (i.e. dates of expected payments) and monitor client credit files
Maintain detailed records
(i.e. official receipts) to validate all financial transactions
Require a paper tail
to monitor collection efforts
Require weekly performance collection reports
The last step and they need to give this to the management on a regular basis
Performance Monitoring Reports
- to collect and recover hardcore delinquent accounts
- must be a separate, specialized unit with its own portfolio of hardened accounts
- mist have goals, targets, and reporting mechanisms
- should provide performance monitoring reports to management on a regular basis
Remedial Management Unit
