2 INTRODUCTION DEFINITION OF CREDIT (LOAN) Credit is defined as “The provision of or a commitment to provide funds on an unsecured or secured basis to a debtor who is obliged to repay on demand OR at a fixed or determinable future, the amount borrowed together with fees and/or interest thereon.
4 LOAN PORTFOLIO MANAGEMENT Bad loan portfolio can spell doom and trigger another credits crisis in the country. In the circumstances therefore, emphasis on lending ethics, credit control and administration is very important. Generally speaking, the declining economic fortunes of the country, coupled with dwindling market have significantly deteriorate credit quality. The result is that many banks, knowingly or unknowingly are carrying bad or defective loans and have not adequately tested their credit risk management system.
5 LOAN PORTFOLIO MANAGEMENT In addition, most lending officers tend to underplay the importance of credit control and administration in their lending function because of the difficulties usually associated with it.In a volatile economy like Nigeria where banking plays role in business finance, it becomes imperative that control of lending must be exercised so that the bank is not caught off guard because of poor administrative control of its loan portfolio.
6 LOAN PORTFOLIO MANAGEMENT CONT’D A customer who is aware that he is not being monitored has every chance and temptation of diverting the original loan to riskier ventures that could cause the banks a lot of harm.A businessman in a period of uncertainties lives more on his wits with an interest danger of overtrading; overstocking, unjustified expansion and diversification which could result in business catastrophes and consequently bad debts for the bank.
7 LOAN PORTFOLIO MANAGEMENT CONT’D If the increasing wave of bad debts now engulfing the banking industry is to be abated, these speculative tendencies on the part of customers and passive approach by lending officers towards credit control must be discouraged.
8 STRATEGIES FOR LOAN PORTFOLIO MANAGEMENT Like any management process, loan monitoring and supervision requires a process of action, analysis and follow-up. The following points are helpful in the loan supervision approach.
9 STRATEGIES FOR LOAN PORTFOLIO MANAGEMENT (CONT’D) Regular review of financial statements such as trading, profit and loss statements and balance sheets. These are useful but limited in function since they are mostly historical. An up-to-date financial position in form of management accounts prepared by the company’s accounting staff is more desirable. This is critically reviewed by comparing actual with projections and variances determined which could form the basis of subsequent discussions with the customer.
10 STRATEGIES FOR LOAN PORTFOLIO MANAGEMENT CONT’D BALANCE SHEET - Quality should be assessed and a trend analysis established over a given period could reveal the company’s performance.Data like current assets, current liabilities, fixed assets, long-term borrowing, turnover, net worth and profit and loss over 2-4 years could give a general over-view of financial strength.
11 STRATEGIES FOR LOAN PORTFOLIO MANAGEMENT CONT’D Compliance with loan agreements, frequently agreements usually indicate minimum current ratios and liquidity ratios, that the borrowing company must maintain throughout the period of the loan. A deterioration will call for explanation. Without close monitoring a breach of the loan agreements may be undetected which could endanger the bank’s exposure.
12 STRATEGIES FOR LOAN PORTFOLIO MANAGEMENT CONT’D CONTACT THE CUSTOMER - This is necessary for on the spot assessment of the operations of the business through visits. The rule is “Never wait until the customer comes to tell you to hear or know; go in search of what you desire to know”.
13 STRATEGIES FOR LOAN PORTFOLIO MANAGEMENT CONT’D OPERATION OF ACCOUNTS - How a customer conducts his accounts should be of interest to the banker in general, the following situations should be watched:-Direction of cheques paid on the accountNature of payments into the accountDiscipline in customer’s account e.g. Frequency of excess requests, poor debts servicing etc.
14 STRATEGIES FOR LOAN PORTFOLIO MANAGEMENT CONT’D TURNOVER TRENDS - Customer sale revenue must be compared with the credit turnover passed through the account. If there is a wide variation, there is need for further explanation. It is not uncommon for customer to play one bank against the other in this manner. The unlucky bank is the one which does not monitor the account’s operations.
15 STRATEGIES FOR LOAN PORTFOLIO MANAGEMENT CONT’D INTER BANK FACILITIES - In the case of syndicated Loans, the process of managing the account begins as soon as the Loan agreement is executed by all participating banks and the accounts are subject to constant review and subsequent meetings where applicable, between the lenders. Usually the lead banks undertakes to furnish the participating banks period information arrange interview with the company’s management to enable them attend pertinent issues raised by the banks.
16 EARLY WARNING SIGNALS (A) BALANCE SHEETS Slow down in receivables collection period.Deterioration in customer’s cash position.Sharp increase in the amount of account.Slowdown in inventory turnover.Decline in current assets as percentage of working capital.Deterioration of liquidity working capital.Rapidly changing concentrations in fixed assets.
17 BALANCE SHEET (CONT’D) 8. Large decrease in reserves.Concentrations in non-current assets other than Fixed Assets.10.High concentration of assets in intangible.Disproportionate increase in current debt.Substantial increase in long-term debt.Low equity relative to debt.Significant change in balance sheet structure.
18 EARLY WARNING SIGNALS CONT’D (B) INCOME STATEMENTDeclining sales.Rapidly expanding sales.Major gap between gross and net sales.Rising cost percentage and narrow margins Receivables.Rising level of bad debt losses.Disproportionate increase in overhead relation to sales / Profit.Rising level of total assets relative to sale.Operating losses.
19 EARLY WARNING SIGNALS CONT’D (C) MANAGEMENTChange in behaviour and personal habit of key management staff.Marital problem.Change in attitude toward bank or banker (lack of co-operation).Resurgence of problems presumed to have been Solved.Inability to plan.Poor financial reporting and controlsFragmented functions.
20 MANAGEMENT CONT’DVenturing into acquisition, new business, new Geographic area or new product line.Desire and insistence to take business gambles taking undue risk.Unrealistic pricing of goods and services.Failure to perform personal obligation.Changes in management, ownership or key staff.
21 MANAGEMENT CONT’D Illness or death of key personnel Inability to meet commitments of profitable standard linesDelay in reacting to declining markets or Economic conditions.Lack of visible management succession.One-man operations showing growth patterns that strain owner’s capacity to manage and control.Change in business, economy or industry.Labour problems.
22 EARLY WARNING SIGNALS CONT’D (D) OPERATION OF BUSINESSChange in nature of company business.Poor financial records and operatingInefficient layout of plant and equipment.Poor use of people.Loss of key product lines, distribution rights or sources of supply.Loss of one or more major, financially sound customers
23 (D) OPERATION OF BUSINESS (CONT’D) Substantial jumps in size of single orders or contract that would strain existing productive capacity.Speculative inventory purchases that are out of line with normal purchase practicesPoor maintenance of plant and equipment.Deferred replacement of out model or inefficient plants and equipments.Evidence of stale inventory large level of inventory or inappropriate mix of inventory.
24 EARLY WARNING SIGNALS CONT’D (E)BANK ACCOUNTS / BANKINGRELATIONSHIPDeclining bank balancesExcessive note renewals or unanticipated note renewalsHeavy reliance on short-term debtMarked changes in timing of seasonal loan requestsSharp jumps in size / Frequency of loan requestsRequest for more working capital as purpose for loan.Appearance of other lenders in financial picture, specially sharing of collateral.Evidence of cheques written against unclear effects
25 CONTROL THROUGH LOAN DISBURSEMENT AND OTHER DRAWDOWN CONDITION It is usual for bank to plan some control measures over loan disbursements. This will ensure prudent management of financial resources and that loan objectives are optimally achieved. This is therefore often linked with cash flow cycle of the customer, hence an appropriate disbursement arrangement must be applied. For specific types, certain empirical disbursement criteria and consideration do apply. These are succinctly stated below:-
26 A) HOUSING LOAN No disbursement until a firm’s builder agreement has been signed.No disbursement until customer’s contribution has been ascertained and paid up.Disbursement should be strictly against architects certificateDisbursement should be made direct to contractor.
27 B) SHARE LOANSDisbursement should be made only after customer has met his contributions e.g. 20% of the cost of investmentPayment made direct to the issuing house, stockbroker or registrar.Returned monies in respect of un-allotted shares to be paid to the bank to reduce customer’s share loan.Independent source of repayment must be assured.
28 C) LOANS OR OVERDRAFTS FOR SPECIFIC PURPOSES Payment should be made direct to suppliers for financing specific invoices.Payment to be effected against LC documentation for import financing under letter to credit.Payment direct to landlord for rent and advances.Payment against delivery notes for other specific payment.
29 C) LOANS OR OVERDRAFTS FOR SPECIFIC PURPOSES (CONT’D) However, with respect to overdrafts, these will be utilized according to the customers requirements. The direction of cheques issued to assess such transactions are in line with the customer’s operations, the beneficiaries and size of such cheque should be watched by the banker when going through cheque clearing or internal operations in general.
30 D) CONSUMER LOANS Ensure good record keeping Track group of consumers Employer guarantee – where possibleDomicile income accountAdequate insurance over assetsPeriodic assets checks on percieved high risk customer
31 E) SECURITY CONSIDERATION IN DISBURSEMENT Loan should not be disbursed until customer has satisfied all security formalities. He is willing to comply in furnishing all necessary documentation but this is not always the case once he has taken the money.No disbursement should be allowed against anticipatory approvals.Finally, all disbursement should pass through the customer’s current account.
32 LOAN MONITORING & CONTROL In many instance credit based on good judgment have turned bad not because the canons of lending were not adhered to but mainly due to poor administration and control of the credit. It then follows that for effective management of a sound loan portfolio, there is the need for accurate monitoring and proper documentation of credit facilities.
33 LOAN MONITORING & CONTROL CONT’D Acceptance of the terms and conditions of the loan on the copy of the letter of offer by customer. In case of corporate borrower, a board resolution accepting the terms and pledging security to the banks is obtained.Collection of all relevant documents required for the perfection of security. (Where applicable.)
34 LOAN MONITORING & CONTROL CONT’D Disbursement should be in accordance with the terms and conditions stipulated in the authorization letter.When the facility is a loan, loan account is opened and debited with loan amount for the credit to customer’s account.Authority to disburse a facility must come from credit administration after a thorough check must have been carried out by the department to ascertain that all conditions precedent to draw down have been met and all the necessary document are in place.
35 LOAN REVIEW AND EVALUATION Credit review is monitoring control or control of advances. If banks fails to review their lending, they will quickly lose all money and be forced out of business.The function of lending and subsequent review of lending are complementary. Most commitments, once entered into are of a continuity nature and are likely to be reviewed monthly, quarterly and annually. Banks must therefore maintain continuity in reviewing facility throughout the life of the commitment so that they will always be conversant with customers situation and so well placed to reach decisions at the proper time.
36 WHEN TO REVIEW LOANSLoan review generally take place under the following circumstances whenever new legislation is enacted or new regulations are imposed by the CBN affecting the established operations of a particular class of industry or commerce in which a borrowing customer is engaged.Whenever a vital information about a company or the class of industry or commerce in which it is engaged appears in the press or some publications
37 WHEN TO REVIEW LOANS (CONT’D) Before a personal contact with the customer whether the contact is by appointment or it is unannounced.When a new manager takes over the branchTurnover should be reviewed daily when facilities are utilized. In some cases turnover covenant must be followed strictlyCustomers accounts should be reviewed yearly at the time of renewal of the facility.
38 OBJECTIVES OF LOAN REVIEW To sport the danger sign as soon as possible. If a borrowing customer is getting into difficulties, it is possible for the banker to save the situation by timely advice.To give us insight into the workings of borrowing accounts as to whether the bank is getting its fair share of the business if not why not?
39 OBJECTIVES OF LOAN REVIEW CONT’D Un-authorized daily debit balances examine the print-out daily to ensure that accounts are operated within limits and authorized excesses have been reported and normalized promptly.Turnover should be reviewed quarterly to ascertain credits and debits as well as earnings i.e. cot plus interest.
40 OBJECTIVES OF LOAN REVIEW (CONT’D) Undertake a comprehensive quarterly review returns.This report should review at a glance the following positions.Position of the account together with limits marked turnover within the period. Comparative turnover within the previous period.Average debit and credit balances.Earnings on the account.Security held.Brief details of latest balances sheet i.e. Estimates of surplus / deficit, total assets, total liabilities and profit.
41 CREDIT EVALUATIONCredit evaluation is the analysis of loan granted and turnover entrusted to ensure that:Accounts are operated within limits.Facilities are well utilized.The account is profitable.Repayments are made on schedule.Overdraft do not become risky.
42 CONDITIONS FOR RENEWAL The account must been active.The turnover must at least be commensurate with the bank’s exposure.In case of installment repayment this must have been met on schedule while an overdraft situation this would have been utilized without developing a hard core.
43 CONDITIONS FOR RECALL Poor utilization of the facility Improper conduct of the accountDevelopment of a hardcore and sickness on O/D casesFailure to meet repayment schedulePoor turnover.
44 CONTROL OF LENDING THROUGH USE OF BANK’S OWN RECORDS One of the ways by which a bank can try to anticipate what is happening to the fortunes of a customer is through computation of figures from a customer’s bank account and analyzing such figures e.g.The maximum and minimum indebtedness to the bankCredit TurnoverAverage balanceAccount LimitIf these figures are produced on a monthly basis and dully analyzed, the banker can gain a good insight into what is probably happening as regards the business’s finances and even its profitability.
45 1. SATISFACTORY BUSINESS The accounts in this category are satisfactorily conducted and thus causing no concern to a banker. Example A customer with O/D of 5m.MonthMax DR. Min CR.MIN DR. MAX CR.MONTHLY TURNOVERAverage Credit BalN 00014,000 CR11,000 CR18,0004,50021,500 CR9,000 CR19,0004,70032,000 CR10,000 CR19,5005,00048,500 CR20,0006,00053,000 CR6,000 CR21,00061,000 CR13,000 CR22,0008,000
46 COMMENTSThe account works well within the overdraft limit, which appears only to be needed for occasional use.The account operates mainly in credit, swinging occasionally into debit.Turnover, during the 6 months has increased by just over 22%. This would be considered as good progress.The business has sufficient working capital to allow it to expand at the rate mentioned in point (C) above.
47 2. BUSINESS WITH HARD CORE BORROWING Example 2 - A CUSTOMER WITH O/D FACILITY OF 25MMonthMax DR. Min CR.MIN DR. MAX CR.MONTHLY TURNOVERAverage credit balN 000125,000 DR18,00014,00019,500227,500 DR19,00013,50019,800323,000 DR17,00014,500424,000 DR16,00014,80020,000528,000 DR14,90022,600621,00014,70024,000
48 COMMENTSThe account already shows hard core borrowing, having never fallen below 16m debit.The borrowing is steadily increasing and excesses have been seenTurnover is relatively static.In view of the above points the bankers needs to speak to the proprietors as a matter of urgency to clarify and / or establish whether.Losses are of are not being made at present andThe level of current assets and liabilities andThe extent of orders currently held
49 COMMENTS (CONT’D)Following the meetings, it may be concluded that eitherThe business needs an injection of capital ORRather than rely on a bank overdraft for what is obviously a medium to long-term need, the hard core element is transferred to a loan accountA long-term institutional mortgage or equity stake is negotiated.The viability of the business must be properly considered before a final decision can be reached.
50 3. LOSS MAKING BUSINESS Example 3 - A CUSTOMER WITH AN OVERDRAFT OF 3M MonthMax DR. Min CR.MIN DR. MAX CR.MONTHLY TURNOVERAverage credit balN 00012,000 DR6,00010,0002500 DR4,0009,5001,900 CR32,000 DR1,5007,00042,500 DR50053,500 DR5,50064,500 DR5,000
51 COMMENTSOver the 6 month period, the account has moved from one which virtually operated continually on a credit basis to one which is continually overdrawn.Turn-over is falling quickly and has dropped by 50% over the 6 months.The proprietors should be called in to the Bank as a matter of urgency to discuss the viability of their business and to clarify various matters.At the same time, the bank would no doubt wish to indicate that excesses on the bank accounts would no longer be permitted.
52 COMMENTS (CONT’D)In the unlikely event of the bank being in adequate secured, an immediate review should take place.As economies move into recession or products become outdated, certain business will go into decline. Quite clearly, competent proprietors will be aware of what would happen in the future it this natural sequence of events was allowed to take place and, so, to remain in existence the proprietors would have to take corrective action (e.g. by diversify).However, some proprietors have blinkered vision and this attitude could, ultimately, bring about the downfall of their business, unless their financial advisers can impress upon them that corrective action is urgently required.
53 4. OVERTRADING BUSINESSThis has been fully described under normal trade finance. Example A customer with an O/D facility of 9mMonthMax DR. Min CR.MIN DR. MAX CR.MONTHLY TURNOVERAverage credit balN 00017,000 DR3,00040,0001,00028,500 DR42,,5002,000 DR39,000 DR50046,0004,000 DR410,000 DR1,50048,0005,000 DR512,500 DR4,00054,000614,900 DR5,50062,000
54 COMMENTSTurnover, during the previous six months, has increased by 55%, so if the projections continued, it would be more than double in a period of a year.Heavier reliance is now being placed on the bank account and continued excesses are being seen.The turnover passing through the account is substantial compared with the swing in the account balance. The individual entries would need to be inspected to see for example, if cheques for round sums are passing through the account.
55 COMMENTS (CONT’D)It could appear that it could be only a matter of time before the “bubble bursts” and possibly creditor get restless.The bank should ask the directors, as a matter of urgency, to call into the branch and discuss the position with regard to the operation of the bank account. A possible solution is the injection of sufficient long-term capital.The bank would want its position to be fully protected and if adequate security is held, the position would have to be regulated.
56 KEY TO SUCCESSThe key to successful Loan Portfolio Management out are: -Know the borrowerUnderstand the business and managements way of conducting businessUnderstand the economic realitiesKnow what you want, fix reasonable goals.Maintain alternatives - be flexibleDevelop strategies with the cooperation of the borrowerMove fastClose monitoring for Loan Portfolio Strategies.
57 CASE STUDYKola Adeyefa (Nig.) Ltd a company which specializes in wholesale trading and major distributorship of liquor, has maintained account with your bank for the past 4 years. The average annual turnover of the company for that period was N50 Million.You are the major bankers of this company for which a working capital of N2 Million was approved 3 years ago against a legal mortgage over the personal residence of the company’s chairman. The property is professionally valued at N12 Million though it is stamped and registered for N2 Million. The personal guarantee of the chairman was also obtained for that amount. In March this year, the chairman of the company asked for an increase in their facilities to N5 Million stating that the increase was needed to assist the company In stocking its stores to meet the daily increasing demand for its customers.
58 CASE STUDY CONT’DIn view of the healthy position of the amount and the apparent adequacy of the company’s security, the request for an increase was granted in April and the security was appropriately unstamped to N5 Million.Towards the end of May that is barely a month after the increase, the company’s stores and chairman’s house were gutted down by fire. At this time, utilization of the facilities had reached 80%. The customers called at your branch to intimate the bank with the development.Identify the bank’s position in the circumstanceMake a report incorporating your recommendation and suggestions to your head office on what has to be done to ameliorate the bank’s position and that of the company.In view of your recommendations, state the precautionary measures that should henceforth be taken by the customer and the bank.
59 QUESTIONSCategorize and explain the regulatory directives with regard to the CBN prudential guidelines.How do you know that a company undergoing distress as the account officer.How would you identify a potential problem loan.What are the critical success factors in managing a problem loan.Loan administration is a multilateral function explain what you understand by this assertion
60 ATTENTION THANK YOU FOR YOUR WONDERFUL Solomon A Aderoju FCIB ,