对外经济贸易大学：《银行管理学 Bank Management》课程教学资源（授课教案课件）Chapter 10 Evaluating Commercial Loan Requests

對酥竹贸易本孝 1951 Chapter 10 Evaluating Commercial Loan Requests

Chapter 10 Chapter 10 Evaluating Evaluating Commercial Loan Commercial Loan Requests Requests

Fundamental credit issues Regardless of the type of loan,all credit requests mandate a systematic analysis of the borrower's ability to repay. When evaluating loan requests,bankers can make two types of errors in judgment. Extending credit to a customer who ultimately defaults. Denying a loan to a customer who ultimately would repay the debt. In both cases,the bank loses a customer and its profits are less. 行贺影小号

Fundamental credit issues Fundamental credit issues † Regardless of the type of loan, all credit requests mandate a systematic analysis of the borrower’s ability to repay. † When evaluating loan requests, bankers can make two types of errors in judgment. „ Extending credit to a customer who ultimately defaults. „ Denying a loan to a customer who ultimately would repay the debt. † In both cases, the bank loses a customer and its profits are less

Five fundamental issues Five fundamental issues ■ Character and data quality ■ Use of loan proceeds ■ Loan amount ■ Source and timing of repayment Collateral In addition to these issues,credit analysis should examine risks that are unique to each loan. Quality of mgt;the soundness of the business; sensitivity to economic conditions;the firm's relationship with other creditors;etc. 碰封醉行贸易大孝

Five fundamental issues Five fundamental issues † Five fundamental issues „ Character and data quality „ Use of loan proceeds „ Loan amount „ Source and timing of repayment „ Collateral † In addition to these issues, credit analysis should examine risks that are unique to each loan. „ Quality of mgt; the soundness of the business; sensitivity to economic conditions; the firm’s relationship with other creditors; etc

Character and quality of data The foremost issue in assessing credit risk is determining a borrower's commitment and ability to repay debts. An individual's honesty,integrity,and work ethic typically evidence commitment.For a business, commitment is evidenced by the owners and senior management. Whenever there is deception or a lack of credibility,a bank should not do business with the borrower. It is often difficult to identify dishonest borrowers. The best indicators are the borrower's financial history and personal references. 的资5土号

Character and quality of Character and quality of data † The foremost issue in assessing credit risk is determining a borrower’s commitment and ability to repay debts. † An individual’s honesty, integrity, and work ethic typically evidence commitment. For a busines s, commitment is evidenced by the owners and senior management. † Whenever there is deception or a lack of credibility, a bank should not do business with the borrower. † It is often difficult to identify dishonest borrowers. † The best indicators are the borrower’s financial history and personal references

Use of loan proceeds Loan proceeds should be used for legitimate business operating purposes Speculative asset purchases and debt substitutions should be avoided. The true need and use of the loan proceeds determines the loan maturity,the anticipated source and timing of repayment, and the appropriate collateral. One common pitfall is to focus too much on collateral and end up financing a firm's long-term needs with short-term notes. 藏的黄香大孝

Use of loan proceeds Use of loan proceeds † Loan proceeds should be used for legitimate business operating purposes † Speculative asset purchases and debt substitutions should be avoided. † The true need and use of the loan proceeds determines the loan maturity, the anticipated source and timing of repayment, and the appropriate collateral. † One common pitfall is to focus too much on collateral and end up financing a firm’s long-term needs with short-term notes

Loan Amount The amount of credit required depends on the use of the proceeds and the availability of internal sources of funds. Borrowers often ask for too little in requesting a loan and return later for more funds. 猫的资6+孝

Loan Amount Loan Amount † The amount of credit required depends on the use of the proceeds and the availability of internal sources of funds. † Borrowers often ask for too little in requesting a loan and return later for more funds

Primary source and timing of repayment Loans are repaid from cash flows. Four basic sources of cash flows: Liquidation of assets Cash flow from normal operations ■New debt issues ■New equity issues 麓行黄事大考

Primary source and timing of Primary source and timing of repayment repayment † Loans are repaid from cash flows. † Four basic sources of cash flows: „ Liquidation of assets „ Cash flow from normal operations „ New debt issues „ New equity issues

Collateral Collateral is the security a bank has in assets owned and pledged by the borrower against a debt in the event of default. Liquidating collateral is clearly a second best source of repayment for three reasons: There are significant transactions costs associated with foreclosure.(Time,money. Bankruptcy laws allow borrowers to retain possession of the collateral long after they have defaulted. 爸封强的黄香+孝

Collateral Collateral † Collateral is the security a bank has in assets owned and pledged by the borrower against a debt in the event of default. † Liquidating collateral is clearly a second best source of repayment for three reasons: „ There are significant transactions costs associated with foreclosure. (Time, money.) „ Bankruptcy laws allow borrowers to retain possession of the collateral long after they have defaulted

What can be collateral? Virtually any assets,or the general capacity to generate cash flow,can be used as collateral. Collateral must exhibit three features: Its value should always exceed the outstanding principal on a loan. a lender should be able to easily take possession of collateral and have a ready market for sale. 麓封强的黄香+孝

What can be collateral? What can be collateral? † Virtually any assets, or the general capacity to generate cash flow, can be used as collateral. † Collateral must exhibit three features: „ Its value should always exceed the outstanding principal on a loan. „ A lender should be able to easily take possession of collateral and have a ready market for sale

Evaluation:A four-part process The purpose of credit analysis is to identify and define the lender's risk in making a loan. ▣Four-part process: ■ Overview of management,operations,and the firm's industry ■ Common size and financial ratio analysis ■ Analysis of cash flow Projections and analysis of the borrower's financial condition 麓的贫香小手

Evaluation: A four Evaluation: A four -part process part process † The purpose of credit analysis is to identify and define the lender’s risk in making a loan. † Four-part process: „ Overview of management, operations, and the firm’s industry „ Common size and financial ratio analysis „ Analysis of cash flow „ Projections and analysis of the borrower’s financial condition