1. Lecture 8 Lending function (1) Franco Fiordelisi Introduction to banking

2. 1.Type of loans 1.Short term loans 2.Long term loans 2.Regulation of lending 3.Step in the lending process 4.Credit analysis 1.Analyzing business loan applications Lecture outline

3. 1.Real estate loans 2.Financial institution loans (e.g. interbanking loans) 3.Agricultural loans 4.Commercial and industrual loans 5.Loans to individuals Growth and mix of loans depends by: The area they serve Lender size (wholesale vs retail credit) Management experience Type of banks (cooperative, savings and commercial banks) 1. Type of loans

4. 1.Self liquidating loans What is the normal cash cycle inside a business firm? Working capital loans Interim construction financing Security dealer financing Retailer and equipment financing Asset based financing Syndicated loans 1. Short-term loans

5. 1.Long-term loans Term Business Loans Revolving credit financing Long-term project loans Loans to support M&A 1. Long-term loans

6. 1.Basel I 2.Basel II 3.Basell III 4.The US Camel Ratings Capital Adequancy Asset Quality Management Quality Earnings recorded Liquidity prosition Sensitivity to market risk Rating scale from 1 (strong performance) to 6 (unsatisfactory performance 2. Regulation of lending

7. 1.Finding prospective loan customers 2.Evaluating a prospective customer’s character and sincerity of purpose 3.Make site visits and evaluating a prospective customer’s credit record 4.Evaluating a prospective customer’s financial condition 5.Assessing possible loan collateral and signing the loan agreement 6.Monitoring compliance with the loan agreement and other customer service needs 3. Steps in lending process

8. 1.Type of loans 1.Short term loans 2.Long term loans 2.Regulation of lending 3.Step in the lending process 4.Credit analysis 1.Analyzing business loan applications Lecture outline

9. 1.The Cs expressing the borrower creditworthy Character Capacity Cash Collateral Conditions Control 2.Analysis of business borrower’s financial statement 1.Profitability indicators 2.Financial structure 3.Cash flows 4. Credit Analysis

10. 1.Type of loans 1.Short term loans 2.Long term loans 2.Regulation of lending 3.Step in the lending process 4.Credit analysis 1.Analyzing business loan applications Lecture outline