Credit Management

Credit Management Credit Products a. Categories of borrowers i. Corporate Borrowers • Type of products o Short-term Lending- Working Capital Financing Running Finance- Advanced Merchandise/Demand Finance Receivable Financing- Factoring, Invoice Discounting Inventory Financing Trade Finance (L/c) o Long-term Lending Term Loan Trade Finance (L/c) • Purpose of borrowing o Working capital- financing of business cycle-receivables, inventory o New ventures and business expansion • Classification o Secured, unsecured/clean, asset-backed o Funded and non-funded facilities/direct and contingent o Size-Corporate, Commercial, SME ii. Individuals/Consumers • Type of products o Overdrafts, loans, revolving credit o Credit Cards o Leasing o Mortgage • Purpose of borrowing o Personal use- running finance o Property o Automobile • Classification o Secured, unsecured/clean, asset-backed b. Regulations and Practices • Relevant SBP laws for lending including: lending limits, exposure calculation, disclosure and reporting requirements • Prevalent market practices and bank policies with respect to lending products c. Pricing i. Calculation of pool rates and internal cost of funds ii. Structuring floating mark-up rates and their impact during change of interest rates iii. The basis for floating mark-up rates using: • Karachi Inter-bank Offer Rates (KIBOR), • SBP Discount Rate and • PIB Rates matching the facility tenor iv. Bank’s spread over cost of deposits relating to customer and transaction risks v. Methods and frequency of mark-up recovery and their impact on income recognition Credit Risk Assessment and Management a. Overview • Fundamental concept of Risk Management • Risk and the economic environment • Corporate governance and organizational structure • External reporting b. Sources of lending risk • Obligor Risk • Obligor Business and industry risk – cycles, price trends of raw materials, price trends of competition products • Transaction failure risk • Other risks – political, economic, market, liquidity, foreign exchange, interest rate risk c. Risk Assessment • Financial analysis • Market check • Market research • Compliance with regulation requirement • Customer Integrity and capability d. Risk Management • Credit Policy • Delinquency portfolio – trends and control measures • Collection and Recovery – strategies and methods e. Types of collateral • Stated and implied lien over customer’s assets • Hypothecation • Assignment of receivables • Pledge of paper securities • Pledge of goods • Mortgage of immovable assets Documentation and Collateral a. Different types of financing agreements • Project financing • Account receivable financing • Lease financing b. Types of collateral documentation • Hypothecation agreement • Lien agreement • Pledge agreement • Standby letter of credit c. Safe-keeping of borrower/customer documentation • In-house arrangements and its modus operandi • Ex-house arrangements and its modus operandi • Arrangements for storage of documents and the system for recording • Procedures to be followed for depositing and retrieving documents d. Bank’s risk under various types of collateral e. Monitoring of charge/margin • Appointment and role of Muccudums • Obligations of the custodial services under the arrangement • Monitoring Guarantees- issuer’s status, guarantee validity, conditions for claims • Monitoring of Insurance Policies- issuer’s status, policy validity, conditions for claims • Monitoring of Immovable Assets • Monitoring of stock reports and valuation • Proper system and credible sources for monitoring prices of financed assets and collateral Management of Credit a. Facility account monitoring • Frequency of peak/low facility utilization, swing in account balances • Frequency of irregularities in facility accounts • Difficulties in operating within present limits • Meeting facility turnover requirement and quantum of business booked b. Facility monitoring systems • Significance and use of reports on activity in facility account • Due date diaries for retrieval of due amounts or settlement of facilities Past Due Accounts a. Classification • Basis for classification/classification triggers • Action steps based on classification level b. Past-due account management • Activating remedial action • Customer contact modes depending on severity of failure in meeting commitments • Determining net exposure and status of financed assets and collateral • Reporting defaults for in-house remedial action i.e. fulfillment of any inter-bank commitments that cannot be met any longer from borrower’s repayment c. Rescheduling and restructuring of borrower accounts d. Loan loss provisioning