Credit Analysis - Slides

ACCESS BANK PLC
ENTRY LEVEL TRAINING

PROGRAM
Credit Analysis
Course Approach
Class Rules
Even if on:
- Silent
- Flashing /
Vibrating
Importance of Credit Analysis
Life Perspective: A good knowledge of Credit Analysis

enhances your Career advancement in the bank and
success in life.
Useful as well in letting you live a life that errs always on the
side of caution and prudence in life.
Career Perspective: Given that the sustainability of the

bank depends on how well it can manage its Risk Asset
Portfolio, a staff who gets lending right almost in all
occasions for the bank can not help being rewarded with
rapid promotion scaling the ascendance ladder in the
bank quicker than colleagues
Bank’s Perspective: The bank takes Credit

Analysis and related subjects very seriously.
Staffers are penalised where they do not pass
the Credit Policy guidelines test of the bank for
all officers of the bank
Learning Objectives
At the end of this programme participants should have a working knowledge

of:
 The importance of Lending in the bank’s business

 How to screen applications for loans from various Customers and select
the ones that meet Access Bank’s Risk Acceptance Criteria.
 How to perform qualitative and Quantitative analysis on prospective
customers to determine viability and future ability to repay loan.
Learning Objectives Cont’d
 Gain competence in identifying inherent risks in particular loan
applications and proffer mitigations for the same.
 To check for profitability of loan transactions
 Structure and Monitor loan performances
 How to determine loan delinquencies

Learning Objectives Cont’d…
They should also know how to:
 Check individuals/ business for traits that could serve as a warning for the bank
not to lend.
 Apply financial and accounting knowledge hitherto acquired to take good

decisions in lending.
Lecture Sequence
Introduction to Credit Analysis: Ice breaker-’The Good Samaritan’ Why a Bank
must lend. Credit Risk definition. The Credit thought process. The fundamental
Issues in Credit. Why Businesses /People borrow. Overview of the logic behind
Module Credit Analysis. The Credit Analysis Process. Critical factors for success in Credit
Day 1
1&2 Analysis. Lending Trade offs… Case Study Review. Understanding Commercial
Banking today. Macro Economic and Industry Analysis. Budget Perspectives.
Industry Analysis Case Study
Principles of Lending. Merchant of Venice Case Study. Canons of Lending (Cs

Credit). Attitude of African Borrowers. The Credit Process In Access Bank. Types
of borrowing Customers/Access Bank Risk Acceptance Criteria. .How to evaluate
Commercial Loan Request. Fundamentals of Credit Structure. Loan Structuring
Modules
Day 2 Principles.. Dynamics of various Loan Types. Types of Lending Rationale -
3&4
ACL,APL,CFL.. Credit Products and peculiarities. Regulatory Intervention Credit
Products. Credit Products and their peculiarities. contd..Quantitative Aspects Of
Credit Analysis/ Case Studies.
Lecture Sequence
Data Mining and Analytics in Retail Lending, Full application of Financial
Analysis tool, Interpretation and application (including forecast) for Credit
Day 3 Module 5
Decision making. Mock presentations.
Credit Risk Analysis. Risks inherent in Credit Products. Identifying Risks

using the Operating Cycle/Transaction Dynamics-Diversion, Supply Input,
Market, Collection Risks etc.in Lending . Business,/Economic ,Industry and
Day4 Module 6 Product Cycles and Lender’s & Borrowers behavior. Credit administration.
Rating/Credit Screening. Risks and mitigation in the Capital Investment
Cycle.
Collateral matters, Handling Problem loan and relationship between Credit
Analysis Subject and Access Bank’s Credit Policy Guidelines. Prudential
Modules Guidelines . Early warning Signals. Loan Documentations. Lending
Day 5
7, 8 & 9 Contemporary Issues-CRC, CRMS, Sustainability Banking and Basle 111
Accord
Introduction
MODULE 1
 Introduction to Credit Analysis: Ice breaker-’The Good Samaritan’
 Why a Bank must lend.
 Credit Risk definition.
 The Credit thought process. The fundamental Issues in Credit.
 Why Businesses /People borrow.
 Overview of the logic behind Credit Analysis. The Credit Analysis Process.
 Critical factors for success in Credit Analysis. Lending Trade offs… Case Study
Review. Understanding Commercial Banking today.
PRE COURSE EXERCISE
The Good Samaritan
 You have been approached by a fellow worshipper in your church who you recognize as one
of the regulars. You don’t know anything about him, not even his name, although he seems
friendly enough
 He tells you he is in dire straits and would need your help. He needs you to lend him only
N30,000 (thirty thousand naira) which he says he’ll repay in three months. He talks
excitedly about a very promising business venture which he is very optimistic will yield him
lots of money such that he is willing to repay you with interest at 100% at the end of the
three months.
 He apparently knows you work in a bank.
 Assuming you have no savings but have a friend from whom you can get the N30,000 but at
10% per month;
PRE COURSE EXERCISE: (2)
The Good Samaritan
 List any concerns, if any, you might have about lending him the money
 List any actions that you can take to address the concerns
 Suppose at the end of the 3 months, he is unable or unwilling to pay you as agreed, list
actions you would take to get back what he owes you
 If he insists he can only pay you back N30,000 and then, only within 9 months, would you
agree? State why or why not
 Would you be willing to forego the interest? Why or why not?
 How would you explain the situation to your friend and would you expect him to
understand?
 How will this experience affect your attitude to lending money to people in the future?
Why a Bank Must Lend
CONFLICTS IN THE LENDING BUSINESS-The trade offs in lending
 ASSET-LIABILITY MISMATCH
– Tenor mismatch
– Rate mismatch
 PROFITABILITY Vs LIQUIDITY- The Liquidity Curve. Point of maximum
Liquidity/ profitability
 PROFITABILITY Vs SOCIAL RESPONSIBILITY.

WHAT IS CREDIT?
According to the Oxford Advanced Learner’s Dictionary
 ‘THE PERMISSION TO DELAY PAYMENT FOR GOODS OR

SERVICES UNTIL AFTER THEY HAVE BEEN RECEIVED.
 ‘THE STATUS OF BEING TRUSTED TO PAY MONEY BACK TO

SOMEBODY WHO LENDS TO ONE’
Credit – What does it mean practically?
There are three practical acceptable meanings for CREDIT in financial terms.
Credit & The Business of Banking
The principal business of banks, particularly commercial banks, is to make loans to
qualified borrower. This is done in three ways viz: Direct Lending, Guarantee or
Underwriting
Attributes Direct Lending Underwriting Guarantee
When the bank channels When the bank makes it easier for When the bank provides an
funds to deficit sectors of its customers to find credit from assurance (guarantee) to a
Definition the economy through some source with the bank agreeing third party lender on behalf of
direct loans to underwrite the customer’s its customer
security issue
Obligation Primary Obligation Secondary Obligation Secondary Obligation
Overdraft, Term Loans, Commercial paper. Banker’s Advance payment guarantee,

Examples Import Finance Facility, acceptance performance bonds etc
Trade Finance etc
High Medium Low
Risk All of Credit Risk All of Credit Risk All of Credit Risk
Interest Spread. Interest Spread Fees
Return High Credit related fees Brokerage Fees
Credit & TBB: Why do Banks Lend?
Credit & The Business of Banking
The principal business of commercial banks is to make loans to qualified borrowers. Who are the
qualified borrowers?
A qualified borrower exhibits willingness and ability to pay within the right conditions
Willingness • Character • Collateral • Coverage
Ability • Capital/contributions • Capital/Competence • Cash Flow
Conditions • Conditions External
Attributes Personal Banking Business / Commercial Banking Corporates

Individuals, SOHO, SMEs, Commercials Customers, Service National Corporates, MNCs
Definition Professionals Sectors, Asian Companies
Working Capital, Mortgages Working Capital, Long-term Capital, Working Capital, Long-term
Requirements Cyclical financing shortfall Capital
SALAD, Overdrafts, Overdrafts, Term Loans, Trade Finance Overdrafts, Term Loans,
Examples Mortgage Loans facility Trade Finance facilities,
Advanced Structurings
High Risk, High Returns, High Risk, High Return, Low Risk, Low Return,
Risk Profile Low Volume(Absolute) Good Volume(Absolute) High Volume(Absolute)
Personal Networth Cash Budget, FSA FSA, Projected Fin. Statement
Return
WHAT IS CREDIT
RISK?
 THE LIKELIHOOD THAT THE BORROWER WILL BE UNABLE TO REPAY THE PRINCIPAL
SUM AND INTEREST WHEN DUE.
 BANK’S EXPECTATIONS OF THE BORROWER ARE:

1) Timely re-payment of principal and,
2) Timely payment of interest.
• NOTE: Timeliness depends on what was agreed with the customer when the loan was
granted
WHY BE CONCERNED ABOUT TIMELY
REPAYMENT?
• BANKS FUND THEIR ACTIVITES FROM
– Shareholders’ funds. To meet infrastructure. Excesses (if any) for working Capital
– Deposits from customers and others- Deposit Liabilities:7day notice Savings, Call,
Time, BA etc.
• BANKS MUST
– Maintain or increase the shareholder’s funds because of capital adequacy and
growth ratios: CAMEL measurement
– Put themselves in a position to return customers’ funds with interest as at when due
– Maintain specified liquidity ratios
– Have enough liquidity to undertake growth and expansion
Why Would A Business Borrow?
1. To fund current assets needs.
2. To acquire fixed assets.
3. To replace existing liabilities.
4. To change existing capital structure.
5. To bridge anticipated temporary cash flow gap
6. To enhance lifestyle?
7. To invest in financial and real assets?
Borrow Cause vs Borrow Purpose.
• Borrow cause is the root cause of why the customer is in need of bank
assistance; and needs money. e.g diversion of sales proceeds to buy fixed
equipment; delayed collection of receivables; reduction of credit received
from suppliers; major operational losses or cash frauds.
• Borrow Purpose is exactly what the customer will do with the money once
granted-Must be Specific. e.g Buy raw materials, Install new plant, Factory
or Home renovation
CREDIT PROCESS
CREDIT CREDIT
COLLECTION MARKETING
CREDIT CREDIT
MONITORING ANALYSIS
CREDIT CREDIT
DISBURSEMENT DECISION
OFFER
CREDIT
&
DOCUMENTATION
ACCEPTANCE
CREDIT THOUGHT PROCESS
You should be thinking…
 What is the borrower’s networth?

 What percentage of the total facility will borrower be willing to contribute
to underscore his belief in the project?
 Where will the cash for the repayment come from
 Does it look like he has the experience and expertise to actualize his
business goals/objectives
 What risks will the bank be exposed to if it grants the credit request?
 Are there factors that can mitigate the risks?
 How can we protect ourselves if things don’t go as planned?
 What kind of loan structure suits the customer’s purpose.
KEY STEPS IN THE CREDIT APPRAISAL
PROCESS
1. Lending opportunity identification
2. Credit evaluation/assessment
3. Summarization of analysis and findings.
4. Credit risk mitigation/protection plan.
5. Credit Report writing.
OBJECTIVES OF CREDIT ANALYSIS
 Understand the business of the borrower
 Ascertain the viability of the project
 To make a judgment as to whether or not the project is bankable
 To ascertain the financial status of the borrower and his credit
worthiness.
 To isolate the factors affecting his business operations.
 To understand the environmental and other business factors that can
impact on the borrower’s operations.
 To determine the most appropriate loan structure for the loan sought.
KEY SUCCESS FACTORS
CREDIT
ANALYSIS:
KEY SUCCESS FACTORS
 Working knowledge of related subjects:
 An objective and unbiased disposition.
 Thoroughness and an eye for details
 Focus on the profit equation (P=R-C)

Key Success Factors
 An inquisitive mind
 Timely appraisal of request
 Matching speed with accuracy.
 Prioritising the need to understand the customer’s business
 Always making sure you have complete information.
 Willingness to make a recommendation; never sitting on the fence.
 Logical reasoning.
 Ability to analyse and interpret financial figures
 Understanding of the customer’s industry and competition.
 Conducting independent investigations despite the information provided by the
borrower.
Key Success Factors
 Ability to withstand pressure or temptation to book poor quality loans in order to

meet income targets.
 Being able to match risk and reward.
 Need to strike a balance between excessive loan loss provision and customer
satisfaction/retention.
 Being able to reconfirm information obtained from independent sources.
Key Success Factors
 Understanding of the bank’s credit policy.
 Ability to propose appropriate credit structure and risk mitigants.
 Ability to withstand pressure from dishonest borrowers in spite of the profit
potentials.
FACILITY APPROVAL MEMORANDUM
 Sample FAM, Facility Approval Memorandum

 Sample FSR, Facility Summary Report
 Class Exercise
MODULE 2
The Environment of Credit

1. Macro-Economic and Industry Analysis
2. Overview of Macro Economic Variables
3. Thoughts on Current year Budget,
Opportunities, Threats and Implication on
lending
4. Industry Analysis
5. Case study: Preparing & Analysing Industry
Report of a Borrowing customer
Macroeconomic Analysis
The Global vs Domestic Economies
 International oil market developments affect the
Nigerian economy because of our huge
dependence on oil export receipts to finance
imports and domestic production.
 Recall the global financial crisis of 2008 which was
triggered by sub-mortgage crisis in the United
States of America. It affected both the capital and
money markets in Nigeria.
The Domestic Macroeconomy:
Key Variables
Gross
Unemploy Interest
domestic Inflation
ment rates rates
product
Exchange Budget Consumer

rates deficit sentiment
Demand and Supply Shocks
 Demand shock - an  Supply shock - an event that

event that affects influences production capacity
or production costs
demand for goods and
 In Nigeria, it’s the exchange
services in the economy rate volatility and monetary
policy of the Central Bank of
Nigeria
Demand-side Policy
 Fiscal policy – the government’s spending and taxing actions
 Monetary policy – manipulation of the money supply

– Targeted at the Cost, Quantity and Direction of Money (Credit)
Fiscal Policy
 To summarize the net effect of fiscal policy, look at the budget surplus or
deficit.
 Deficit stimulates the economy because:

– it increases the demand for goods (via spending) by more than it
reduces the demand for goods (via taxes)
Monetary Policy
 Manipulation of the money supply to influence economic activity.
 Increasing the money supply lowers interest rates and stimulates the economy.
 Less immediate effect than fiscal policy
 Tools of monetary policy include open market operations, discount rate, reserve
requirements.
Supply-Side Policies
 Goal: To create an environment in which workers and owners of capital have the maximum
incentive and ability to produce and develop goods.
 Supply-siders focus on how tax policy can be used to improve incentives to work and invest,
i.e. progressive taxation vs regressive taxation.
Business Cycles
 All economies, over time, go through periods of expansion, recession and
recovery.
 The length of each section of the cycle can vary from time to time.
 The seeds of the next phase are usually sown in the preceding phase.
 Lending bankers need to be sensitive to the key indicators of the next phase in
the business cycle so as to determine the credit risk strategy.
The Business Cycle
Co-cyclical Industries Non-Cyclical Industries

 Above-average sensitivity to the  Little sensitivity to the business
state of the economy. cycle
 Examples include producers of  Examples include food
consumer durables (e.g. autos) producers and processors,
and capital goods (i.e. goods pharmaceutical firms, and
used by other firms to produce public utilities
their own products.)  Low betas(sensitivity to
 High betas (sensitivity to economic cycle is low)
economic cycle is high)
Economic Cycle And Loan Behaviour
1. RECESSION
2. RECOVERY
3. EXPANSION
4. BOOM
Economic Cycle
ECONOMIC PHASE BORROWER LENDER BEHAVIOUR
CHARACTERISTICS BEHAVIOUR
 Liquidation in the case of  Cautious credit expansion.
marginal customers.  Mindful of the need to
RECESSION ensure credit quality.
 Faced with back-logs and  More reliance on security.
Characterized by order cancellations,  Tendency for non-
unemployment and idle inventory and cuts performing loan to
production; receivables run increase.
capacity
off, undertakes cost cutting  Efforts put on loan
programme. recovery.
 Ought to reduce bank  Request for Credit
borrowing. Greater overall Restructuring.
reliance on internal
financing.  Resort to short term self-
liquidating facilities.
Economic Cycle…
ECONOMIC PHASE EXPECTED BORROWER EXPECTED LENDER
CHARAC-TERISTICS BEHAVIOUR BEHAVIOUR
 Makes efforts to improve  Loan volume shows signs of
balance sheet liquidity.
RECOVERY AND  Grants concessions to buyers pickup in the face of excess
EXPANSION to push up sales. bank liquidity.
 Inventory and receivables build
up.  Intense competition tends to
This commences  Increase productivity and push bankers into unsound
with pick-up in earnings. deals.
 Updates plant and equipment:
consumer spending consider future capital needs.  Rates rise and business
 Introduces new products and borrowers turn to banks
new ventures appear.
rather than to capital/bond
 Large borrowers turn
extensively to CP. market.
Economic Cycle…
ECONOMIC PHASE EXPECTED BORROWER EXPECTED
CHARACTERISTICS BEHAVIOUR LENDER
BEHAVIOUR
 Optimism mounts. Orders and  Optimism mounts.
BOOM prices rise above historic norms,
often to unsustainable levels.  Increasing amounts
 Reluctance to use long-term loaned against rising
Production of goods and financing. Substitution of short
services outruns the and intermediate credits. cash flows: lenders
economy’s long term  Fears credit controls. overly generous.
Anticipatory buying of supplies
potential. The result if and raw materials. Increases Susceptible to euphoria
accelerated inflation. prices whenever possible. and loss of judgment of
what constitutes good
credit. Mania for growth.
Economic Cycle…
ECONOMIC PHASE EXPECTED BORROWER EXPECTED LENDER
CHARACTERISTICS BEHAVIOUR BEHAVIOUR
 Profit margins narrowing.  High dependence on cash
Growth of internally generated
funds slows. Demand for short- flow for repayment
term credit up. capacity.
BOOM
 Backlog increases as expansion  Demand for short-term
ages. Inventory rises. funds increasingly
Production of goods and
services outruns the strengthens.
economy ’ s long term  Cost of replacing depreciated
capital equipment as well as  Lending for capital
potential. The result is
those of stocks of materials all
accelerated inflation. spending grows as
rising.
upswing continues.
Economic Cycle…
ECONOMIC PHASE EXPECTED EXPECTED LENDER
CHARACTERISTICS BORROWER BEHAVIOUR
BEHAVIOUR
 Total Profits swelled by  Banks tend to become
BOOM windfall inventory gains. proxies for the equity and
Profitable lines mask weak long term debt market.
Production of goods and lines.  Wise lenders exercises
services outruns the  Corporate liquidity declines; caution; stress avoidance of
economy’s long term increasing instances of exposure to weakening
potential. The result if excess leverage. borrowers.
accelerated inflation.  Anticipating a credit
squeeze, revolving and
other forms of committed
credit are negotiated.
Federal Government of Nigeria: 2022 Proposed Budget
Aggregate Expenditure BUDGET DEFICIT
-6.26tn
16.39tn
10.13tn $57
Capital Expenditure Benchmark oil
Aggregate Expenditure
4.89tn price p/b
Sinking Fund 1.88

6.9tn
Key Assumptions
292bn Oil Production
(mbpd)
Non-Oil Revenue Debt Service

3.6tn N410.15
Exchange Rate
To US$
Recurrent non-debt
3.16tn 6.82tn 4.2%
Oil Revenue Projected
Statutory Transfers Growth rate
(including capex)
768.27bn 13%
Target Inflation
51
|
Federal Government of Nigeria: 2022 Proposed Budget
2021 (Including Supplementary 2022 Proj.
(NGN)’Billion Budget)
Aggregate Revenue 8,121.41 10,132.46
Aggregate Expenditure 14,570.76 16,391.02
Statutory Transfers 496.53 768.27
Recurrent Non-Debt 5,765.30 6829.02
Debt Service 3,124.38 3,609.24
Capital Expenditure 4,984.55 5,354.31
Projected Budget Deficit (6,449.35) (6,258.57)
Assumptions
Benchmark oil price per barrel ($) 40.0 57.0
Oil production (mbpd) 1.86 1.88
Exchange rate (Naira to US$1) 379 410.15
Target inflation 11.95 13.00
GDP Growth rate 3.0 4.20
52
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Industry Analysis
Defining an Industry
 Industries could be grouped according to
– Usage of a particular raw materials, i.e. cocoa industry; rubber industry; flour
milling industry; steel industry; cotton industry, etc.
– Homogeneity of the finished products, i.e. textile industry; plastic industry; shoe
industry; wood furniture; housing industry; chocolate drinks industry.
– Common services, i.e. banking; insurance; hotels

Sensitivity to the Business Cycle
1. Sensitivity of sales:
 Necessities vs. discretionary
Three factors determine goods
how sensitive a firm’s  Items that are not sensitive to
earnings are to the income levels (such as tobacco
economic cycle. and movies) vs. items that are,
(such as machine tools, steel,
autos)
Sensitivity to the Economic Cycle
 Firms with low operating
leverage (less fixed assets) are
2. Operating less sensitive to business
leverage : the conditions.
split between
fixed and  Firms with high operating
variable costs leverage (more fixed assets) are
more sensitive to the economic
cycle.
Sensitivity to the Economic Cycle
3. Financial  Interest is a fixed cost

leverage: that increases the
the use of sensitivity of profits to the
borrowing Economic cycle.
Industry Life Cycles
Stage Sales Growth
Start-up Rapid and
Consolidation increasing
Maturity Stable
Relative Decline Slowing
Minimal or negative
Which Life Cycle Stage is Most Attractive?
Quote from Peter Lynch in ‘One Up’ on Wall Street:
" Many people prefer to invest in a high-growth industry,

where there’s a lot of sound and fury. Not me. I prefer to
invest in a low-growth industry. . . .
ANALYSING INDUSTRY CHARACTERISTICS – M.
PORTER’S MODEL
Porter’s 5 Force Model
www.azadsikander.blogspot.com
Michael Porter …
“An industry’s profit potential is largely

determined by the intensity of
competitive rivalry within that industry.”
Barriers to Entry …
… large capital requirements or the need to gain
economies of scale quickly.
… strong customer loyalty or strong brand
preferences.
… lack of adequate distribution channels or
access to raw materials.
Power of Suppliers …
… high when
* A small number of dominant, highly
concentrated suppliers exists.
* Few good substitute raw materials or
suppliers are available.
* The cost of switching raw materials or
suppliers is high.
Power of Buyers …
… high when
* Customers are concentrated, large or buy in
volume .
* The products being purchased are standard or
undifferentiated making it easy to switch to
other suppliers.
* Customers ’ purchases represent a major
portion of the sellers’ total revenue.
Substitute products …
… competitive strength high when

 The relative price of substitute products
declines .
 Consumers’switching costs decline.
 Competitors plan to increase market
penetration or production capacity.
Rivalry among competitors
… intensity increases as
* The number of competitors increases or they become equal in

size.
* Demand for the industry ’ s products declines or industry
growth slows.
* Fixed costs or barriers to leaving the industry are high.
Summary …
As rivalry among competing firms intensifies,

industry profits decline, in some cases to the point
where an industry becomes inherently
unattractive.
INDUSTRY SPECIFIC RISKS
Basis for Analysing Industry Characteristics
Market • Product
– Size – Differentiation
– Scope – Potential for economies of
– Growth rate scale
– Growth cycle – Learning effects
– No. & size of competitors – Entry / exit costs
– Distribution channels – Technological change
– Structure
• Forward Integration
• Backward Integration
Industrial Market Structure
Market
Characteristics
Structure
Single producer that controls the market. Good to do business with, as credit risk is
likely to be lower. Consider the price elasticity of demand for the industry’s products
Monopoly or service.
Two producers or suppliers in the market. Characterized by action and reactions. A

leader may emerge between the two. Your credit risk may be lower if you bank the
industry leader because demand risk could be lower.
Duopoly
Few producers in the market. Competitive industry. Selectively lend to the firms doing
Oligopoly well in the market.
Highly competitive market. Highly level of product differentiation. Chances of any of

Monopolistic the firms going under is high. Follow clearly the Bank’s Risk Acceptance Criteria in
choosing a firm for credit relationship.
Competitive Market
Group Assignment: Industry Study
Using the template in previous slides on industry characteristics, prepare an industry
report on the following industries and present your report:
1. Hotel industry in Nigeria
2. Flour Milling Industry
3. Chocolate Drinks industry
4. Brewery industry
5. Telcom (GSM) industry in Nigeria
6. Cement production industry
7. Plastics industry
NOTE: Your report should include a forecast on the outlook of the industry.
MODULE 3
Credit Basics
• Credit Analysis Basics
• Attitudes of Nigerian borrowers
• The C’s of Credit
• The Credit Process in Access Bank
• Types of borrowing Customers and their
risk assessment tools
• Evaluating Commercial Loan Request
Credit Basics
PREPARING TO LEND
 The first step towards lending is to gather information about the borrower
 Understand the nature of the business and industry characteristics.
 Understand your bank’s credit policy
 Avoid or disclose your personal interest/relationship with borrower.
 Business should be profitable enough to meet the bank’s charges and residual
income for the borrower.
Fundamental Credit Issues
CHARACTER
&
CAPACITY
• Success at loan structuring BUSINESS
entails full understanding of DYMAMICS
the borrower’s MEGA
ENVIRONMENT
 CHARACTER,
 CAPACITY
 BUSINESS
 ENVIRONMENT
Attitude To Bank Loans (1): What Should the Bank Do?
In Nigeria and many African countries…
1. Bank loans are seen as getting a share of the ‘national cake’.

2. Many see banks as exploiters so why not take the loan and then repudiate later.
3. Many have schemes to deceive the bank with respect to documentation for the
credit and collateral offered.
4. Others will obtain the loan for a valid purpose but shift purpose without any
qualms and without informing the bank
5. Many will spend the proceeds from the bank loan to fund the maintenance of
false societal status
6. Where a loan becomes bad, many will exploit the prevailing weak judicial
systems and use the court to tie up the banks.
Borrower’s Attitude To Bank Credit (2)
7. Gives maximum co-operation before loan is granted but becomes extremely
evasive thereafter.
8. Doctors financial statements to make the company appear financially
creditworthy.
9. Diverts funds from the company for personal uses resulting in the entity
becoming an empty shell.
10. Has no stable residential and official address.
11. Many will insist that “What banks need to approve a credit is good security, not
project feasibility”.
Class Assignment:
Ask trainees to propose ways of preventing these problems from occurring.
Case Study
Review Merchant of Venice Case Study

The C’s of Credit – (Canons Of Lending)
CHARACTER CAPITAL
1 CAPACITY 3
2
4
CONDITION CASHFLOW
5
CONNECTION
6 COLLATERAL
7
Obligor Types & Characteristics
• Customer relations or marketing officers opening new accounts should bear in mind
that each current account customer is a potential borrower in the bank.
• The borrowing could be:

– Authorized or
– Unauthorized.
• If an officer grants a loan above his discretionary powers, it unauthorised lending. Any
credit granted which does not follow due process is unauthorised.
Obligor Types and their Characteristics
MODULE 4
FUNDAMENTALS OF
CREDIT STRUCTURING
Fundamentals of Credit Structuring
Credit Structuring Why Credit Structuring?
Inappropriate credit structuring portends
Credit Structuring is the process by which risk of borrower’s default
the Bank aligns its customer’s needs
(amount, purpose, tenor, utilization, It forms a basis for assessing the
borrowing cause, dynamics, performance of a loan
documentation, collateral, pricing, mode,
It engenders smooth flow of the
repayment sources, conditions, &
transaction
covenants) to its own needs for a given
level of safety, suitability and profitability. It prevents fund diversion, structure
mismatch in financing, and ensures
proper monitoring for repayment
Fundamentals of Credit Structuring –
Basic Questions
Request Screening Facility Amount –
What is the specific request? Working Capital Requirement
Cash Flow Analysis/ Funding Gap
Is it Legal, within the target market Equity Contribution and Bank
of the Bank as stated in the Credit Lending
Policy Manual, and General
Banking Practice? Borrowing Cause
Sales growth
What caused the need to borrow – Fixed Asset Procurement
No plan, business opportunity/ Collection Slow down
exigencies? Slow down of biz cycle
Seasonal Sales Growth
What are the terms of the
underlying transaction?
Basic Questions
Facility Type
Purpose
Based on Purpose and Usage or
Purpose determines specific usage
Purpose determines transaction
Based on Type and Pattern of Cash- flow
Flow or Non-achievement of Purpose as
per milestone alerts the lender of
Based on Transaction Dynamics possible diversion or problems
* Note that structural mismatch is a
Tenor
serious issue in lending
What is the appropriate tenor for
the facility – Term Loan, Working
Capital (Overdraft), BAs, Leases,
Time Loan, Import/Export Finance
Basic Questions
Disbursement Mode Disbursement Mode …..
This can be determined by terms of
Facilities, irrespective of the type,
trade or at the spot of a business
are disbursed only through
opportunity or in a way that minimizes
current accounts
cost of lending through Milestone
Disbursement (Staggered), or Bullet
Ability of the Lender to control Disbursement (One-Off), or
disbursement instills financial Installment Disbursement and Spot
discipline and prevent fund Assessment
diversion
Repayment Pattern
Largely determined by Source – Cash
Flow/ Sale Proceeds/ Asset
Conversion Patterns-
Milestone/Bullet/Relationship
Basic Questions
Conditions Precedent Permits/ Licenses/ Regulatory Approvals
(e.g. DPR Permits)
Under this, all required
Verified underlying transaction document
documentation i.e.
(e.g. NNPC Invoice and Allocation) + Any
Offer Letter Other matters
Account Opening Transaction Dynamics
This states the step-by-step flow of credit
Documentation
events, from start to end
Board Resolution, etc Conditions, Covenants, etc
Collateral/Security – Its Nature, Restriction on facility usage & assets
Location, Legal Status, Value and pledged, Restriction on further borrowing,
Negotiability are very key. Use of Domiciliation Letter,
Equity Contribution Warehousing/Monitoring, Escrow Account,
Trust receipt, Recovery, etc
Common Flaws
Use of Overdraft to finance Asset Specifying too short or too long a
acquisition/ Lease/ Import tenor
finance transaction
No Equity Contribution required of
Use of Term Loan to finance the borrower (100% finance by
working capital or bridging Lender)
finance
Interest Rate too high, or not
sensitive to borrower’s risk profile
Defective transaction dynamics and transaction’s profitability
Lending for unjustified purpose or Proper Analysis is not done, and

cause transaction becoming a loss
Common Flaws
Repayment amount too short or No alternative way-out like secondary
too high compared to inflow source of repayment .
Security/Collateral not perfected before
Repayment due dates for booking
loans/leases not properly timed to
Booking facility long before need; this
cash flow erodes the profitability and creates room
for diversion
Lending short or more than the
amount required for a transaction Allowing for counter-offer amendments
requests from the borrower to the credit
Booking credits to meet budget structure without weighing their effects
pressure at the risk of capital/or
Waivers/Deferral of documents
interest
Conditions Precedent to Draw Down
&
Transaction Dynamics
Conditions Precedent to
Drawdown
This explains the conditions that the borrowing customer must meet
before the facility shall become available for drawdown
1.
2.
3.
4.
5.
6.
7.
Perhaps you have other conditions! You might decide to state these
conditions.
Examples of Condition Precedent
 Submission of duly executed Board resolution of corporate borrower
 Submission of duly executed Board resolution of corporate guarantor
 Receipt of security, guaranty and collateral agreements and notes
 Evidence of no substantial changes in the financial condition of an adverse nature
since (date)
 Submission of clean report that collateral is free of liens
 Submission of clean CRC and CRMS report
Access Bank
Samples of Conditions Precedent to
Draw Down based on Facility Type
TRANSACTION DYNAMICS
Transaction Dynamics
This explains the step by step process of how the loan would be
disbursed to repayment. This excludes pre-loan disbursement. This is to
monitor the disbursement and repayment of loan so as to guide against
diversion.
1.
2.
3.
4.
5.
6.
7.
Access Bank
Samples of Transaction
Dynamics based on Facility Type
Types of Lending Rationale
Types of Lending
Rationale
Asset Conversion 1 Asset Protection 1 Cash Flow Lending 1
This involves financing stocks to sales This is a loan longer than a year. All
using the measurement of time. E.g This entails use for short-term vehicle project financing falls under this. The
LPO, Invoice Discounting to finance Permanent level of working attraction is how much and timely is the
capital. This is security-based lending. cash flow.
Features include short-term financing, For example, Overdraft against Cash
self-liquidating, generally unsecured, or Legal Mortgage. The attraction is Features include permanent needs,
payback or primary protection is the how much and liquid is the collateral. and stream of earnings/cash is
borrower ’ s ability to complete the essential. It is also used for investment
cycle. Working capital is a good Features include likely continuous activities (corporate exercise).
example. rollover, the ultimate justification is the
value and marketability of the The principal and assurance of
Ratios used are stock turnover period, collateral, and the borrower is of performance are key to success
debtor ’ s turnover period and sufficient integrity and capacity.
creditor’s turnover period Limitation: counterparty risk; cash flow
The nature of the security, should be looked at with respect and
Limitation: Static, Historical and convertibility, location and relative skepticism
Distorted by seasonal business stability are a significant factor for
consideration. Limitation: Diminution in
asset value
Credit Products and their Peculiarities
OVERDRAFT  In offering overdraft, the bank allows her
 It’s usually to finance short-term working customer to overdraw her account to an
capital to tide over the production cycle - agreed limit with good swings.
raw materials or finished goods - occasional
seasonal peaks, etc.
 Max tenor of 1 year but revolving every
90-180days
 It’s the most flexible for the borrower but
repayable on demand.
 Overdraft accounts are expected to drive
good turnovers and are liquid in nature
 Rates are adjustable in line with money
market realities
 Non-performance is easily observable
OVERDRAFT (Cont’d) RISKS OF OVERDRAFT
 Because of its loose utilization, overdrafts are
usually backed with collaterals  Possible misuse of facility
 It requires close monitoring and guidance for  Monitoring difficulty

probable diversion
 Loan recovery difficulty
 Overdraft is just a commitment and could be
withdrawn at will unlike loan
 Tendency to remain evergreen
 Veracity of underlying cash flow

TIME LOAN TERM LOAN

 This is a loan with a backend, one-off,  This includes short, medium and long-
term facilities availed for projects, object,
bullet repayment of principal and
equipment or construction purposes or
interest for a tenor of up to 12months start-up financing.
 It involves regular payment of principal

 Facility could be availed against
and /or interest
revenue generating asset acquisition/
project finance with bullet repayment  Moratorium on principal/interest is
cash flow structure sometimes allowed
 Rates could be fixed or variable (e.g.

LIBOR pegged). Variable rates are
preferred by banks.
LEASES
 A lease is a contractual arrangement  An operating lease is essentially a
whereby the lessor, the owner of the rental arrangement.
asset, allows the lessee to use the asset
for a specified period of time in return for  A finance lease is, in substance, a
periodic payments. purchase of an asset that is financed
with debt.
 The periodical payment made by the
lessee to the lessor is known as lease  Under IFRS, lease classification is
rental. determined by examining the
economic substance of the
 Leases are classified as either finance transaction. If substantially, all the
leases or operating leases. rights and risks of ownership are
transferred to the lessee, the lease is
treated as a finance lease.
Differences between Operating Lease and Finance Lease
Operating Lease Finance Lease

1. Ownership of the asset remains with the lessor 1. Ownership transfer option at the end of the
for the entire lease period. lease period is there with the lessee.
2. Operating lease is treated generally like renting. 2. Financial lease is treated like loan generally.
That means, the lease payments are treated as Here, the asset ownership is considered of
operating expenses and the asset does not show the lessee and so asset appears on the
on the balance sheet. balance sheet.
3. The lessee is allowed to have a purchase
3. The lessee does not have any option to buy the option at less than the fair market value of the
asset during the lease period. asset.
4. Lessee pays only the monthly lease payment in 4. Lessee bears insurance, maintenance and
operating lease taxes.
5. lease payment is considered as expense. No 5. Lessee can claim interest and depreciation
depreciation can be claimed both as financial lease is treated like a loan.
Differences between Finance Lease and Term Loan
FINANCE LEASES TERM LOAN
1. It is used to finance purchase of an asset 1. It is used to finance to purchase of assets and
2. Equal rental sum is paid over the period other projects.
2. In term loan, Principal and Interest is paid
3. There is no moratorium period granted in separately
Finance Lease since the asset is owned by 3. There could be moratorium granted for
the lessor. Principal or Principal and Interest.
4. The lessor is the sole owner of the asset until 4. The obligor may be the sole owner of the
maturity when ownership is transferred asset being financed
5. The asset financed must be part of the 5. The asset financed may not be part or the
security pledged only security pledged
6. The amount contributed in the purchase of 6. The amount contributed by the
the asset by the lessee is called Customer borrower/obligor in Term Loan is called
Contribution Equity Contribution
7. A penal charge is paid by the lessee for Pre- 7. There could be no penal charge for early
liquidation or cancellation of the facility settlement or cancellation of the term loan
facility provided it is stated in the Offer letter.
IMPORT FINANCE FACILITY EXPORT FINANCE
 The facility granted for importation of raw  For financing exporters of food, solid
materials, and industrial goods or minerals, agro-chemical products, and
equipment. Import finance facility could consumables
be disbursed using Banker’s Acceptance,
Dollar Usance, Letters of Credits, etc.  While an inward L/C applies to export
financing, an outward L/C or back-to-
 This product is very common in view of back L/C applies to import finance
import dependent nature of the economy
supported with a Form M.  Before financing export contract, a valid
 However, product of import must meet Form NXP with satisfactory terms to the
legal concerns of countries involved. exporter and lender must be in place.
INVENTORY FINANCE RECEIVABLES DISCOUNTING
 This is a short term loan made to a  Accounts Receivable Financing is an
company for the purchase of products asset-based financing arrangement in
for sale. which companies use their receivables
 These products/inventories serve as as collateral in exchange for cash
collateral for the facility
 Inventory financing is useful, especially,  Receivable finance unlocks working
for businesses that must pay their capital, enhances your cash flow,
suppliers in a shorter time period than reduces the risk of bad debts and
what is taken in selling the inventory to unleashes business potentials for
customers. Moreover, it also provides a customers/borrowers
solution to seasonal fluctuations in cash
flows in addition to helping a business
reach a higher sales volume.
LOCAL PURCHASE ORDER(LPO) MORTGAGE LOAN
FINANCING  A credit facility to customers to
 LPO financing is designed for growing part-finance the acquisition of
businesses that want to fulfill large residential property in selected
order. cities within the country. The
 It is a short-term commercial finance tenor is usually 20 years or more
option that provides capital to pay  Mortgages come in many forms.
suppliers upfront for verified purchase With a fixed-rate mortgage or with
orders an adjustable-rate mortgage.
 LPO financing is similar to Inventory  The bank has a claim on the

Financing but it is more specific house should the home buyer
default on paying the mortgage.
Other Credit Products- Regulatory Financing
AGRICULTURAL LENDING Commercial Agriculture Credit Scheme
 Specialized loans are approved to (CACS)-
farmers as an initiative set up to
transform the country’s agricultural NGN200 billion Fund established by the
sector. CBN and the Federal Ministry of Agriculture
and Rural Development as a strategic
response to the lingering food and energy
 The CBN guarantees 75 per cent of crisis worsened by the global financial
Agricultural loans provided by Banks. melt-down.
 It is a flexible financing tool designed to The fund can be accessed by medium and
change the behaviour of financial large scale integrated and non-integrated
institutions driven to improve agricultural projects with a minimum of
investment outcomes and job creation. NGN50 million net asset base.
State Governments are also eligible.

Commercial Agriculture Credit Scheme Agricultural Development Trust Fund
(CACS)- Credit(ADTFC)
 The Scheme is a partnership between This is a tripartite arrangement between a trust
CBN/FMA&RD and a top tier bank. It provides fund provider, the Lender and CBN (guarantor)
credit for fresh investment/expansion of to provide working capital loans for farm
commercial agricultural enterprises. business.
 Eligible activities include cultivation of target Farmer saves 25% of eventual credit need,
crops (rice, cassava, cotton, oil palm, wheat, while trust fund provider sets aside 25% and the
rubber, sugar cane, jatropha citrus, fruits and lender provides 100% of farmers' working
vegetables), livestock's (dairy, poultry, capital requirement.
piggery) and fisheries.
CBN guarantees 75% of the unsecured margin
 Loan tenor is between 5 - 7years + Pricing is of 50%. Farmer enjoys 40% interest rebate
maximum of 9% all in. under the CBN's Interest Drawback Programme
(IDP) upon full repayment of facility as and
when due.
BANK OF INDUSTRY LOANS BOI criteria
 These are loans given to small, medium and  BOI therefore, considers industries that
large enterprises, excluding cottage meet the following criteria:
industries both new or existing companies,
seeking expansion, modernization or  Capacity to substantially add to industrial
diversification output.
 BOI/CBN work together with local and  Projects that use largely domestic raw
international development finance materials.
institutions and commercial banks to provide
funding for key capital projects.  Industry in which Nigeria’s comparative
advantages could be converted to
 In Nigeria, SMEs account for over 90% of competitive ones.
the companies in Nigeria, account for half of
the nation’s GDP, and provides employment  Ability to promote the expansion of exports
for more than 30% of its populace-Rasheed through the production of high quality
Olaoluwa, MD Bank of Industry, November products that are attractive to domestic and
2014 export markets.
BOI criteria BOI criteria
 Projects that create both forward and  Projects that are environmentally friendly.
backwards linkages, with the rest of the
domestic or regional economy.  Enterprises that have good management
set-up and proper accounting procedures.
 Ventures that promote inter-state or
regional integration.  Enterprises promoted by women
entrepreneurs
 Small and medium enterprises (SMEs)
that have linkage with large firms, belong  Niche projects that produce for worldwide
to clusters and operate under franchise. consumption.
 Enterprises with high employment  The project must be technically feasible,

generation capacity. commercially viable and economically
desirable.
Available Long term Funds with the Available Long term Funds with the
BOI/CBN BOI/CBN
 Cottage Agro Processing Fund  Rice Intervention Fund (NGN10bn)
 Dangote-BOI fund (NGN5bn)  Sugar Development Council Fund
 Business Fund for Women  NAC Fund (NATIONAL AUTOMATIVE COINCIL

FUND BY BOI)
 Power and Aviation Fund  MSME Fund
 CBN Intervention Fund (NGN235bn)  Cement Fund
 AFDB Line of Credit  CTG Fund (NGN100bn)-COTTON TEXTILE

AND GARMENT (CTG)
Available Long term Funds with the Available Long term Funds with the
BOI/CBN BOI/CBN
1. The Rice Intervention Fund of N10 4.AFDB US$500 million Line of Credit:
billion: designed to ensure Nigeria This is made available for the
attains self sufficiency in rice development of export oriented SMEs.
production. Interest rate is 4% per
annum. 5. CBN NGN235 Billion Intervention
Fund-for refinancing of Commercial
2. Dangote-BOI N5bn Fund for Small Bank’s exposures to SMEs in the
Businesses: designed for the Manufacturing sector. Interest rate is at
development of MSMEs across the 7% per annum.
nation. Interest rate is 5%.
6. Cotton Textile and Garment (CTG)
3. Sugar Development Council Fund: Fund of N100 billion: Designed to
This is designed to ensure Nigeria revitalize the CTG Industry along the
attains self sufficiency in sugar entire value chain. Interest rate is at 6%
production. Interest rate is 4%. per annum.
Other Credit Products- Others
BANKERS ACCEPTANCES BAs provide banks with opportunity to
It is a draft drawn on and accepted by a manage their lending portfolio as they are
bank, unconditionally ordering payment of a treated as off-balance items in the
certain sum of money at a specified time in computation of Risk Weighted Assets for
future to the order of a designated Capital Adequacy Compliance (Basel II)
party….CBN Circ.
BAs have underlying trade

transactions/bills. They are negotiable
instruments and are transferable by
endorsement
The regulated tenor is a maximum of

180days and not renewable. It ’ s a
discounting instrument (upfront interest)
Credit Products- Others
COMMERCIAL PAPERS SYNDICATED LOAN
These are issued by blue-chip/investment grade
borrowers (deficit units) to source funds from the
surplus units in the economy while the bank acts as
an intermediary • DEFINITION
• PURPOSE OF LOAN DYNDICATION
The Bank carries no risk except reputational here • THE PARTIES
except if it guarantees the CP. The Bank earns • THE ROLES AND
Commission on the transaction (e.g. 1%) RESPONSIBILITIES
• MECHANICS OF SYNDICATION.
CPs are unsecured with tenor of 30 – 270 days.
The investor is expected to be comfortable with the
borrower’s integrity, cash flow strength, reputation
and creditworthiness before investing in the paper
BANK GUARANTEE This requires that the financial institution
This is a surety that is provided by a bank be very sure of the business or individual
or a financial institution that they will pay off to whom the bank guarantee is being
the debts and liabilities incurred by an issued. So, banks run risk assessments
individual or a business entity in case they to ensure that the guaranteed sum can be
are unable to do so. retrieved back from the business.
This helps a business to invest on a larger This may require the business to furnish
scale than would have been possible a security in the shape of cash or capital
without the bank guarantee. assets. Any entity that can pass the risk
assessment and provide security may
obtain a bank guarantee.
By providing a guarantee, a bank offers to
honour any payment to the creditors
Types of Guarantees include:
upon receiving a request.
1. Performance Guarantee( Bid Bonds

Performance Bond: Order and Counter Guarantee
2. Advance Payment This is a surety given by the debtor
Guarantee: to the creditor, to protect against
3. Payment Guarantee the failure to fulfil an obligation as
contracted. In case of default, the
creditor can demand the payment
back.
MODULE 5
Practical application
of Financial
Statements
to Lending Decisions
What to learn
 Data Mining and Analytics in Retail Lending
 Practical Application of FSA tools and customised Interpretation of analysis
results.
 Group Exercises on need identification from Financial statement analysis,
Projections and loan proposal
 For Individuals and
 Corporate bodies.- IFRS compliant financials.
 Credit Presentation- Access Bank format practice
 More practice- Cash budget, Cash flow Statement
Tools for analysis
1. Common Size/ Vertical analysis
2. Horizontal Analysis- Change
3. Trend Analysis-growth/shrink
4. Ratio Analysis including segmental analysis
5. Cash Flow Statement analysis & usefulness for lending
6. Cash budget /projections
7. Free Cash flow and its imperative for lending
8. Projected Financials and loan repayment
Assessing Borrower’s Financial Health
INFORMATION/DOCUMENTS YOU NEED:
1. Statement of Financial Position
2. Income Statement
3. Cash Flow Statement
4. Projected Cash Flow Statement
5. Cash Budget
6. Chairman’s Statement
7. Director’s Report
8. Audit Committee Report
9. Independent (External)Auditors’ Report/Opinion
What is Data Mining?
• The extraction of novel, implicit, and actionable knowledge from large datasets.
• Extremely large datasets
• Discovery of the non-obvious
• Useful knowledge that can improve processes
• Can not be done manually
• Technology to enable data exploration, data analysis, and data visualization of very large databases at a high level of
abstraction, without a specific hypothesis in mind.
• Sophisticated data search capability that uses statistical algorithms to discover patterns and correlations in data.
Application of Data Mining
Data Mining Application for Retail Business
• Performing basket analysis
– Which items customers tend to purchase together. This knowledge can improve
stocking, store layout strategies, and promotions.
• Sales forecasting
– Examining time-based patterns helps retailers make stocking decisions. If a
customer purchases an item today, when are they likely to purchase a
complementary item?
• Database marketing
– Retailers can develop profiles of customers with certain behaviors, for example,
those who purchase designer labels clothing or those who attend sales. This
information can be used to focus cost–effective promotions.
• Merchandise planning and allocation

– When retailers add new stores, they can improve merchandise planning and
allocation by examining patterns in stores with similar demographic characteristics.
Retailers can also use data mining to determine the ideal layout for a specific store.
Uses of Data Mining
• DM helps to
Data Warehouse Customer Profile Data Mining
– Determine the behavior
surrounding a particular lifecycle
event
Customer Life Cycle Info.
– Find other people in similar life

stages and determine which
Campaign Management customers are following similar
behavior patterns
Technology-Enabled Selling; Omni-Digital Banking
• Typically banks collects a lot of data in their daily

interactions with customers. More often than not
this data remains invisible or latent in the banks
CUSTOMER TARGETING core application.
• Data mining provides banks with the opportunity
CUSTOMER to better understand their customers by mapping
SEGMENTATION
their digital trail with a view to following their
CUSTOMER LIFE CYCLE lifestyle and / or behavioural preferences.
MGT. • Data Mining has become an even more valuable
tool as customers embrace banking via digital
CARDHOLDER PRICING
channels more and more.
& OFFERINGS
• This means that the activities of the bank’s
customers can be digitally tracked to support
product development, channel selection, and
etcetera
Data Mining – Personalized Banking
Areas in Banking that Benefit from Data Mining

• Customer Experience Management: This consists of strategies that allow getting new knowledge
about customers’ preferences from available analytics.
• Market Analysis and Customer Insight: This includes relatively new strategies for market analysis
and customer insight based on gathering and processing data from the Internet.
• Channel Performance Study: Including, all data from banking channels in a more efficient way with
the aim to increase their profitability
• Credit Risk Management: Social media interactions, transactions, purchase patterns and so on
could be used as additional sources of information in Credit risk management.
Relationship Management – The Digital Experience Matters
• Even with perfect data, analytics and targeting, the digital consumer is now more sophisticated and
very aware of available options and can quickly shop for the digital experience that meets their
needs for any particular banking product or service.
• For instance, if an ‘omni-digital’ consumer is looking for a loan, and their primary bank proactively
connects with them with offers, the digital consumer still does their due diligence due to the
availability of vast information.
• If the application, approval and funding process for the loan become cumbersome, the customer
will quickly migrate either to another platform or another bank
• The digital customer demands experiences that are easy to use (dummy proof). The online retailers,
travel, hospitality and tech companies have set the expectations for omni-digital customers. Banks
cannot afford to fall short of the standards set by other retailing organisations.
• Prospective customers will appreciate the ability to do a quick click on an email offer link, but they’ll
prefer that the process doesn’t have too many steps.
Assessing Personal Borrowers and Guarantor’s
Financial Status
What is Net Worth?
Net Worth = Assets – Liabilities
Net worth IS NOT money available for use BUT an indication of your financial position at a given date
Personal Financial Statement as at

……….
ASSETS LIABILITIES
What One owns: What One owes:
 Deposit & Other Accounts  Housing loans
 Loans to others  Car loan
 Investments  Other Loans
 Cars  Unpaid monthly bills
 Houses/Estates/
 Ranches
 Jewellery Net Worth
 The balance is personal wealth
 Furniture
 Aircrafts, Boats/Ships
The Personal Financial Statement (PFS) is actually a personal balance sheet. If Liabilities are more in value than
Assets, Networth will be negative and vice versa
Personal Financial Statement
Net Worth Statement
Template
Personal Financial Statement as at .....................
Assets - What You Own
Cash on hand and at bank on all Accounts PFS is prepared from
Money owed you  Personal and employment
Investments (Shares, bonds, unit trusts etc at market values) records
Movable and immovable Property (Car, Building, Jewellery, bicycle, etc.)
 Money management and bank
Others _________________
records
 Tax records
Total Assets
 Financial services records
 Credit records
Liabilities - What You Owe
 Consumer purchases and
Credit Card balances, OD, Term Loans automobile records
Utility and Other Bills
 Housing, insurance, investment
Others ________________
records
Total Liabilities
Net Worth (Total Assets minus Total Liabilities)

Networth is increased by:
1. Increasing savings/income
2. Reducing spending
3. Increasing the value of investments
Personal Cash Flow Statement
 Also called a personal income and expenditure 2 . Record Expenses
statement  Variable
 Is a summary of cash receipts and payments for a given  Phone Bill
period, such as a month or a year  Gifts
 Cry Cleaning
 Feeding
Preparation Steps
 Transportation
1 . Record Income
 Wages and salaries
 Bonuses 3 . Determine Cash Surplus or Deficit
 Interest and dividends  If Income > Expenses = Surplus
 Saving and investment income
 Gifts etc  If Income < Expenses = Deficit
2 . Record Expenses Latest Cash on Hand =

 Fixed Opening Cash on Hand
 Rent
+ Cash Flow Surplus
 Loan Repayment
 Insurance – Cash Flow Deficit
 Internet and Cable TV Subscription
 School Fees
Liquidity & Savings Ratios
 Ratios to determine whether or not an individual has enough monetary assets (1) to pay for
an unexpected large expense or (2) to tide over during periods of reduced or eliminated
earnings.
– Months living expenses covered ratio
– Current ratio
(1) Months living expenses covered ratio
(2) Current Ratio
 Monetary assets
 Monetary assets Current liabilities
 Month’s living expenses
 This ratio shows whether there are enough
 This ratio tells how many months living expenses can be liquid assets to cover expenses currently due.
covered with present level of monetary assets.  Ratio greater than 2 recommended
 The rule of thumb: 3 to 6 months of expenses
 Factors that affect the rule of thumb
 Available credit facilities [cards] or home equity loans Amount saved per month
 Potential for higher earnings on less liquid accounts
• Stability of income
Take-Home Pay
 This ratio tells what proportion of after-tax
income is being saved.
(3) Savings Ratio
 Rate varies across countries and with stage of
the financial life cycle and goals
Retail Cash Flow Analysis
General Rules of Credit Capacity
Debt Payments-to-Income Debt To Equity Ratio
Ratio
Monthly debt payments Total liabilities
Net monthly income Net worth
Consumer credit payments should not

Debt should be less than net worth
exceed a max of 20% of net income.
*Not including house payment which

is a long-term liability
Credit Scoring Systems

• Credit scoring models are based on historical data obtained from applicants who actually received loans
• Statistical techniques assign weights to various borrower characteristics that represent each factor's
contribution toward distinguishing between good loans that were repaid on time and problem loans that
produced losses
Retail Cash Flow Analysis
Credit Scoring System - Example
Category Characteristics/Weights
<N1.5M N1.5M-N3M N3M-N6M N6M-N9M >N9M
Annual Gross Income
5 15 30 45 60
Monthly Debt Payment >40% 30-40% 20-30% 10-20% <10%
Monthly Net Income 0 5 20 35 50
Bank Relationship None DDA Only Saving only DDA & Saving No answer
DDA/Saving 0 30 30 50 0
None 1 or more No answer
Major Credit Cards
0 30 0
Any derogatory within 7 yrs. No record Met obligated payments
Credit History
-10 0 30
< 50 yrs. >50 yrs. No answer
Applicant's Age
5 25 0
Rent Own/Buying Own outright No answer
Residence
15 40 50 15
Residence Stability < 1 yr. 1-2 yrs. 2-4 yrs. >4 yrs. No answer
0 15 35 50 0
Job Stability < 1 yr. 1-2 yrs. 2-4 yrs. >4 yrs. Unemployed Retired
5 20 50 70 5 70
NOTE: Minimum score for automatic credit approval is 200; score for judgmental evaluation, 150 to 195; score for
automatic credit denial is less than 150.
Corporate Financial Statements Analysis
FINANCIAL STATEMENT RISK
 How current is the annual report/financial statement?

 Are there material changes since the date of the last audit.
 Check for window dressing especially via stock and fixed asset
revaluation.
 Check for inexplicable changes in accounting policy .
 Check for inexplicable change of external auditor.
 Check that the external auditor’s opinion is not qualified
 Confirm that the external auditor is reputable
MEASUREMENT OF FINANCIAL RISK
DOES THE BORROWER HAVE THE ABILITY AND CAPACITY TO
 Fund working capital.

 Funding of capital expenditure.
 Pay maturing debt on schedule.
 Pay dividends at a reasonable rate.
 Maintain borrowing power and grow
through profit retention.
4 QUESTIONS FOR THE CREDIT ANALYST
1. How current are the financials?
2. Have you probed every significant item.
3. Have you decomposed the sales figures to determine the cash cows.
4. What is the net volume of cash generated from operations?

Financial Analysis - Basic Questions
When properly done, the financial analysis should provide answers
to the following :
 Does borrower have adequate stake in the business;

 Will the revenue stream from the borrowing be sufficient to meet the profit/growth
objectives of the business
 Will the cashflow generated from operations be sufficient to cover interest and
principal repayment as well as taxes and dividend payout;
 Will there be sufficient liquidity to meet obligations as they fall due.
Accounting Ratios
KEY ASSUMPTION
 This section assumes that trainees have a working knowledge of ratio formulae
and workings.
 Emphasis therefore will be on interpretation and application of the ratios.
 A separate ratio sheet will be made available to the trainees as part of the course
materials.
Major Types of Accounting Ratios
1. Liquidity/Short term solvency ratios

2. Long Term solvency/Leverage ratios
3. Profitability ratios
4. Asset Utilisation/Turnover ratios
Ratio analysis is used to focus attention on areas that are important for making an
informed credit decision
FINANCIAL STATEMENT ANALYSIS FORMAT ‘A’
 Liquidity/Short term solvency ratios
 Profitability
 Long Term solvency/Leverage ratios
 Asset Utilisation/Turnover ratios

MODULE 6
Credit Risk
• Definition of Credit Risk

• Credit Risk Explained
• Managing Credit Risk
• Modern Approach To Mitigating Credit
Risk
The Fundamental Question
 Who is the best judge of a bank’s exposure to credit risk?
 The supervisor?
 A rating agency?
 The bank itself?

Consequences of Poor Risk Management
 The Shareholders
 Loss of Investment ( Gone Concern)
 Reduction in value of Investment
 Loss of Dividends due to declining profits
 The Customers
 Reduction in Product Offering
 Liquidity Crisis
 Reduction in the level of Customer service
Consequences of Poor Risk Management….
 The Employees
 Loss of Job (Enron/Orange County/Failed Banks)
 Loss of Income (Bonuses/ Pay rise)
 Disciplinary Action
 Dent in Career
 The Economy
 Slow growth in GDP
 Recession/Inflation
 Increased level of Unemployment/ Crime rate
 High Lending Rate
Conclusion
“Every dollar that a bank loans above its capital and surplus it owes for, and its
managers are therefore under the strongest obligations to its creditors, as well as to its
stockholders, to keep its loans under its control. Treat your customers liberally, bearing in
mind the fact that bank prospers as its customers prosper, but never permit them to
dictate your policy. If you have reasons to distrust the integrity of a customer, close his
account. Never deal with a rascal under the impression that you can prevent him from
cheating you. The risk in such cases is greater than the profits.”
-Advice to Bankers of 1863

ENTERPRISE RISK MANAGEMENT TERMINOLOGIES
Risk The possibility

of an undesirable
outcome or the
absence of a
desired outcome
disrupting your Risk Event The
institution or undesirable outcome
project. Risk Driver
The causal
factor that
results in the
risk
Risk Terminologies (2)
 Risk Owner The person responsible for managing a particular risk.
 Exposure A condition or set of circumstances where a risk event could result in a
loss
 Frequency The probability or likelihood of the risk event occurring or number of
times a risk event is likely to result in a loss
 Severity or Impact The degree of damage that may result from an exposure
What Is Risk?
What is risk?
 Risk is the danger that a certain unpredictable contingency can occur, which generates
randomness in cash flow.
Risk and uncertainty

 Risk differs from uncertainty. Risks may be described using probability analysis (business cycle,
company failures), while events subject to uncertainty cannot (financial crises, wars etc.).
 The business of banking is always tied to a multitude of risks. A major part of the business of
financial institutions is making loans, and the major risk with loans is that the borrower will not
repay.
 Credit risk is the risk that a borrower will not repay a loan according to the terms of the loan,
either defaulting entirely or making late payments of interest or principal.
Definition Of Credit Risk
 Credit risk is the possibility that a borrower will fail to repay his/her debt (s) to the
bank/lender on the due date.
 When the bank/lender is unable to collect the debt (s) from the borrower (s), the
bank/lender will be short by the amount of cash that the borrower has failed to repay.
Another terminology that can be used to describe such a risk factor - “Risk of Default”.
 As a bank or any financial services provider’s credit risk increases over time, this
institution is compelled to make provision to write off the debt (s) in its books of account.
 Loans written-off translates into an operating expenses.

Definition Of Credit Risk
Causes Of Credit Risk
Decline in the credit quality of borrowers or counterparties
Inability or unwillingness of a customer or counterparty to meet loan commitments
Reduction in portfolio value
Forms Of Credit Risk

Non-repayment of the interest on loan or loan principal.
Inability to meet contingent liabilities such as letters of credit, guarantees issued by
the bank on behalf of the client.
Default by the counterparties in meeting the obligations in terms of treasury
operations
Default from the flow of foreign exchange in terms of cross-border obligations.
Default due to restrictions imposed on remittances out of the country
Credit Risk Terminologies Explained
 Credit risk can be defined as ‘the potential that a contractual party will fail to meet its
obligations in accordance with the agreed terms’.
 Credit risk is also variously referred to as default risk, performance risk or counterparty
risk. These all fundamentally refer to the same thing: the impact of credit effects on a firm’s
transactions.
 There are three characteristics that define credit risk:
 Exposure (to a party that may possibly default or suffer an adverse change in its ability to
perform).
 Default Probability (the likelihood that this party will default on its obligations (the default
probability).
 Recovery rate (that is, how much can be retrieved if a default takes place). Note that, the
larger the first two elements, the greater the exposure. On the other hand, the higher the
amount that can be recovered, the lower the risk.
Credit Risk Terminologies Explained
 Credit risk has a number of sub-issues including concentration risk and settlement
risk.
 Concentration risk arises when there are a large number of exposures to parties that
share similar characteristics
 Settlement risk arises when a clearing agent or third party processes transactions for
other parties. Settlement risk is particularly important for financial institutions that
process a large number of high-value transactions.
Credit Risk Explained
Country risk and industry risk – affect multinational enterprises.
There are four factors relevant to this:
 political risk, which arises when a country’s government is challenged externally or
from within national borders
 economic risk, namely the depressed or declining economic stability in a country.
 currency risk, which always arises with cross-border lending.
 enforcement risk from the legal system in the debtor country. Because a creditor has to
go through a foreign legal system, debtors try to use their domestic legal process to stall
or attempt to avoid paying, claiming that rules from their home country apply.
Managing Credit Risk
Introduction
A bank’s first line of defense against excessive credit risk is the initial credit-granting process
involving:
a) sound underwriting standards,
b) an efficient and balanced approval process, and
c) a competent lending staff.
All of the above is shaped by the role of the bank’s directors to provide guidelines and
principles for the bank’s lending activities. Included in these would be: Loan authority, loan
portfolio, geographic limits, pricing policies, off-balance sheet exposure limits, and
loan review process.
Managing Credit Risk – General Principles
 General principles towards reducing credit risk include:

 Avoid making high-risk loans.
 Use collateral
 Diversify
 Proper documentation
 Guarantees by third parties
 Transfer risk to other parties via securitization and loan
participations.
 Specialization in Lending
 Monitoring and Enforcement Loan Covenants
• Long-term Customer Relationships: past information contained in checking accounts,
savings accounts, and previous loans provides valuable information to more easily determine credit
worthiness.
• Loan Commitments: arrangements where the bank agrees to provide a loan up to a fixed
amount, whenever the firm requests the loan.
• Collateral: a pledge of property or other assets that must be surrendered if the terms of the loan
are not met ( the loans are called secured loans).
• Compensating Balances: reserves that a borrower must maintain in an account that act as
collateral should the borrower default.
• Credit Rationing: Lenders will refuse to lend to some borrowers, regardless of how much interest
they are willing to pay, or lenders will only finance part of a project, requiring that the remaining part
come from equity financing.
Modern Approach to Mitigating Credit Risk…
Rouse (2002), in his book on bank lending, suggests that the professional credit risk manager
apply the following ‘lending principles’ to facilitate well-informed, thoroughly analysed and
documentary-supported credit decision:
 Take time to reach a decision.
 Do not be too proud to ask for a second opinion
 Get full information from the customer and do not make unnecessary assumptions (i.e. do
not lend to a business you do not fully understand).
 Do not take a customer’s statements and representations at face value and do ask for
evidence to support the statements.
 Distinguish between facts, estimates and opinions when forming a judgment.
 Think again when your gut reaction suggests caution, even though the factual assessment
looks satisfactory.
MACRO (MEGA ENVIRONMENT) RISKS
 Government is a dominant factor in determining the macro
environment.
 Government economic policies affect many variables including
inflation, fiscal policy and exchange rate.
 Infrastructural inadequacies may be big issue.
 The political environment.
Diversion
Risk
Demand
COMPANY RISK Supply Risk
Risk
Production
Risk
Credit Products Specific Risks
Risk of Inventory Financing
 Stocks may become obsolete.  Check product expiry

 Sub-standard raw materials dates before financing
could be purchased which will same.
affect company’s final output
and sales.  Ensure that borrower
 When loans are obtained to maintains quality
speculate in inventory price assurance laboratory or
fluctuation, the objective may system
not be realized.  Avoid disbursing funds to
 Fall in the price of the final stockpile products for
product may affect cash flow speculative purposes.
and profit.
Inventory Finance & Mitigants
Risk of financing inventory to which  Verify ownership of the
borrower has not legal title. pledged inventories.
 Physical inspection –
Risk of losing the goods due to fraud,
location, safety.
robbery or lack of internal controls.  Survey the market to
determine competitive
strength; market acceptance
and demand profile.
Risk that the market price can fall
below the book value.  Check to ascertain there are
no prior charges,
Risk that there could be subsisting

charges for which the borrower is not
aware.
Receivable Financing – Risk & Mitigants
 Risk that the bank may finance spurious  Confirm genuineness of accounts
receivables that were not accounted for receivables/debtors.
in the books of the borrower.  Analyze credit worthiness of
debtors on whom the accounts
 Risk that the third-party debtor is receivables are created.
insolvent or not in a financial position to
honour obligation.
 Get debtor to agree to assign debt
to the bank - domiciliation of
 Risk that the letter of domiciliation is
payment.
repudiated by the issuing company.  Check if receivable is encumbered.
 Risk that the receivables has

subsisting charges by other lenders.
LPO Finance – Risk/Mitigants
 Risk of financing an LPO that is not validly  Establish validity of LPO

issued by the purported issuing company.
 Ascertain genuineness of LPO
 Risk of financing LPO that has expired  Competence of the borrower to
before delivery of goods. execute the contract.
 Confirm financial status of the issuer
 Risk that the borrower lacks capacity to of the LPO.
execute the supply contracts.
 Verify availability of goods from the
 Risk that the borrower is not able to source ultimate supplier.
the goods from the market overt, leading to
delays and ultimately the staleness of the
LPO.
Measuring The Risk in Pre-shipment
Export Finance
 Nature of customer’s business or  Lending Bank can

export. hedge against the loan
 Time lag between disbursement of
funds and production of goods for  Verify that the borrower has
export. relevant experience in his
 Competence or experience of the trade.
exporter in the business.
 Bank’s previous experience with  The lender should not
the export. finance a business, he
does not understand.
 So, knowledge of
customer’s export business
is key.
Risk factors in post- shipment finance and Mitigants
 Ability of the ship to get to its destination.

 Conformity of the shipping documents with the
L/C specifications.
 Changes in exchange control documentation of
both importing and exporting countries.  All Risks Insurance
 Obtaining of appropriate risk assessment  Track records and experience of
certificate where this is required. the borrower is key to mitigating the
risk.
 Ensure that there is inward letter of

credit to back up post shipment
finance.
 Preferably lend against red clause

letter of credit.
MODULE 7
Loan Documentation and

Considerations
A. Loan Documentation &
Considerations
B. Compendium of Securities in
Lending
Loan Documentation & Legal Issues
Definitions
 Loan
money given to somebody on the condition that it will be paid back later. (Admits of all
kinds of bankers’ advances by whatever name called)
 Lending:
the act of letting somebody use something temporarily subject to its being returned.
 Documentation:
1. Evidential or reference documents provided or collected together as evidence or as
reference material
2. process of providing written information or details about something.
• Documentation consists of written materials (e.g. letters , typed and untyped; signed
agreements; intra-office memos; drafts, cheques and other bills of exchange;
photographs; drawings; video and audio recordings; narratives and other forms of
communications) that clearly describe any aspect of the relationship between the lender
and the borrower
Why Documentation is Important
 To Confirm Relationship
 To Confirm Terms Of The Relationship
 To Confirm Responsibilities Of The Relationship
 To confirm the duties and responsibilities of the lender
 To determine duties and responsibilities of the borrower
 To determine what constitutes default on the part of any of the parties
 To ascertain the rights and duties ensuing from the default of any party
 To confirm the procedure for enforcement of each party’s rights
 To identify any 3rd party to the relationship, his relationship, rights and obligations
 To determine what has actually taken place and the consequential obligations and
rights of all parties
Typical Loan Documentation?
a. Offer Letter
b. Loan Agreements
c. Board Resolution
d. Security Documentation
e. Conditions & Covenants
f. Guarantees/Indemnities
Offer Letter – Its Importance & Details
Its Importance Details of An Offer Letter
 It states the terms and conditions of  Type and purpose of facility

the offer.
 Availability period of the facility
 It specifies the limit or the extent of  Facility Amount
the relationship between the
applicant and the bank with respect  Details of lenders – Most often used for
to the offer. syndicated or agented facilities
 Interest Rate and / or basis of interest
 It specifies the conditions that calculation
should be met precedent to
drawdown/availment of the facility.  Repayment Schedule
 Final Maturity
 Commitment Fee
 Security / Collateral
Loan Agreement & Its Importance
Its Importance
 It is a written agreement between the
 Definition of relationship
borrower and the lender.
 Outline of terms and conditions
 It details the obligations, rights and
 Specification of obligations od
responsibilities of each of the parties.
parties
 It also makes certain warranties and
 Identification of collateral type and
placed restrictions on the actions of the
borrower especially with respect to the value
security.
 Tenor
 Loan agreements were most commonly
used in term lending, but now are used for
short (less than one year), medium and
long term facilities.
Details Of Loan Agreement
 Customer details – Name, address, place of work, etc.
 Definition of relationship between clients and bank
 Outline of terms and conditions – pricing of loan, Equity contribution, Fees (Processing fees, COT,
Management fees, Legal fees, etc.)
 Specification O/D obligations of parties
 Tenor
 Facility request letter
 Terms and conditions
 Loan pricing
 Obligation of the parties to the contract
 Timing and regularity of payment
 Collateral/Guarantees attached
Board Resolution& Its Importance
• This is a written document made by the Its Importance
board of directors.
• Every board resolution makes reference to
• It can detail which officers are the date, time and agreement or decision
authorized to accept a loan, manage reached and made during board meetings.
the account, trade, assign, transfer or • It is usually signed by 2 directors(s) or a
hedge on behalf of the organization director and the company secretary.
amongst others. • These directors must be the most recent
directors as listed on the current Co2 and
• They are only signed and prepared by Co7.
Corporations and Partnerships. • There is need to check the current status of
the company’s borrowing powers and
• Sole Proprietorship do not have Board shareholding structure.
Resolutions
Compendium Securities for
Bank Lending
The Collateral Question
 Banks typically make loans which are perceived to be self liquidating
 They do not approve loans simply because there is adequate collateral
 Collateral (or security) is required to provide an exit route should certain risks crystallise
 A borderline credit may be granted given the presence of collateral
 A collateral can be any asset which produces future cash flow directly or indirectly, which (cash flow)
can be transferred to a lender for the repayments of a part or the entire outstanding debt upon default
Benefits of Collateral
To the Bank To the Customer
• Enhances the probability of repayment • Reduces the incentive to take risk
• Increases lending business • Increases the volume of loan that
can be taken
• Reduces the problem of information • Reduces the risk of over borrowing
asymmetry
• Ensures that the customer has an abiding • Reduces the cost of credit
interest in the loan transaction
Features of Acceptable collateral
Stability of value
Ease of Transfer
Low maintenance cost
Ease of verification of title
Marketability
Not easily pilfered

 When To Take A Collateral
 Where the borrower has low contribution, it will be necessary to take security
 Where a loan is taken to acquire an asset, the asset will also be used as security
 Where an organisation is relatively new or an old firm is going into a new line of business,
security will be desirable
 A company that is making losses will usually have to post collateral
Collateral Coverage
• Bankers do not lend 100% of the value of the asset. The % lent depends on the asset and bank
policy. There is always a collateral coverage – that is the collateral will have a value higher than
the amount lent.
Why?
• The asset may fall in value
• The loan attracts interest and continues to grow if not adequately serviced
• The bank will incur costs if it has to sell the asset
• And may do so at an unfavourable price
Collateral Types & Valuation
 Immovable Collateral  Intangibles
 Real Property: Land and Building  Negotiable instrument
 Plant and Equipment  Document of title
 Natural Resources  Stocks and bonds
 Timber in the forest  Book debt
 General Intangibles
 Goods
 Consumer goods  Other kinds of collateral
 Farm products  Deposit accounts
 Inventory  Life insurance policy
 Equipment
 Fixtures
Principles Of Collateral Evaluation
Collateral evaluation is not to find an accurate, unique price, but to find a price and logic
which are realistic, practical, and acceptable by ordinary market participants.
1. Evaluate collateral on the basis of the market value rather than book value.
2. Seek opinion of major dealers
3. Consider market size and liquidity
4. Apply the most conservative evaluation method.
5. If possible, for immovable property should be located such that bank officers can
take frequent visits. For others, the bank must be in constructive possession
6. Watch the market price if it’s rising fast: a price bubble may be developing.
Securities & Their Respective Issues
Where a collateral is taken, it is important to:
 Obtain an independent view of its value and marketability. A regular review of the value of
the collateral should be performed and any shortfall, when compared with the outstanding
facility amount, should be covered.
 Ensure that there is adequate insurance cover on assets taken as security.
 Make the lender the loss payee in the case of a claim.
 Legally, the assets of a company secure its obligations. However, taking a specific security
puts a lender in a superior position relative to other creditors. To the senior lender, all junior
lenders are effectively equity.
 It is important for a lender to avoid inadvertently taking an inferior position relative to other
lenders
Securities & their Respective Issues
 Depending on the collateral, banks are advised to conduct a search with the relevant
regulatory authority before approving a facility.
 Such regulatory authorities include the Corporate Affairs Commission (CAC), the Land
Registry in the state where the land is situate & the Central Securities Clearing System
(CSCS).
 Banks must also ensure that they register their interest immediately after the loan is granted
or at least commence registration before disbursement. However, ALL documentation
required for the registration process MUST be obtained before disbursement.
 For example all intended Legal Mortgages that are not yet perfected can be referred to as
Equitable Mortgage because the Bank’s interest is still not noted.
Common Types Of Securities For Bank Loans
1. Mortgages
2. Debentures
3. Lien
4. Guarantees and indemnities
5. Negative pledge
6. Right of set-off
7. Letter of comfort
8. Charge over credit balance
9. Domiciliation of payment
10. Letter of hypothecation
Mortgages
 Most widely used form of security by banks and other corporate organisations.
 Created when an interest in a property is conveyed by way of security from a borrower to

the lender for the payment of a debt or for the discharge of some other obligations.
 The borrower is the mortgagor while the bank (lender) is the mortgagee.
 Until full discharge of the loan, the legal title as opposed to possession of the property,
remains with the mortgagee.
 On default, the mortgagee can exercise his right over the mortgaged property either by
way of sale or foreclosure.
 A mortgage can be legal or equitable.

Types of Mortgages
Legal Mortgage Equitable Mortgage
• Operates when the mortgagor (borrower) • Operates where the mortgagor (borrower)
takes steps to convey his legal interest to the merely deposits his title documents with the
mortgagee (bank) by registering an instrument mortgagee, with the intention to give a
of transfer in favour of the mortgagee in an security. The mortgagor may or may not sign a
office designated for it. memorandum of deposit form, indicating the
deposit.
• This is a good title and it does not require the • It is a very weak security when compared to
consent of the court before selling. the legal mortgage. In the event of default, the
cooperation of the mortgagor is required or the
• Types of Legal Mortgages also includes mortgagee has to obtain an order of the court
Tripartite Legal Mortgage otherwise called 3rd to sell.
party Legal Mortgage • Any other registered creditor takes
precedence
Land Titles & Their Importance
• Various Land Title Documentation Importance Of Titles
• Certificate of Occupancy (C of O)
• It gives the final right of ownership to a
• Registered deeds of
landed property.
- Assignment
- Lease
• It is usually required when selling a home
- Sub-lease
or refinancing a mortgage.
• Power of attorney
• Letter of administration (when it covers
• Banks will typically deny mortgage
land)
applications for properties that do not have
• Right of Occupancy by local government
valid title documentation
Various Land Title Documentation (Contd.)
 A certificate of occupancy is evidence of title to land sold by the government (State

& Federal)
 A registered deed is used is used when the property is bought from any other
person/s than the government and states the nature of the transfer.
 A registered power of attorney states the terms of holding the title.
 Letters of administration are used when land is transferred from one to another by
reason of death, where there is no last will & testament.
 Right of Occupancy – Issued by local governments for rural lands within their area.
Types Of Debentures
S650 (1) of CAMA 1990 defines a debenture as “a written acknowledgement of
indebtedness by the company, setting the terms and conditions of indebtedness, and include
debenture stock, bonds and any other securities of a company whether constituting a charge
on the assets of the company or not”
• Fixed Charge Debenture: A charge on the specific listed IMMOVABLE assets of the
borrower excluding landed properties. The listed assets cannot be sold without the
consent of the bank being sought & obtained. The registration of the fixed charge gives a
ranking position to the bank relative to other lenders.
• Floating Charge Debenture: A charge on the current assets or stock-in-trade of the

borrower. The listed assets can, prior to default, be sold without the bank’s consent being
sought or obtained. Again, registration of the floating is crucial for ranking purposes.
NOTE: This charge is subject to the rights of preferential creditors e.g. fixed charge
holders
Types of Debentures
• All Asset Debenture: This is a charge over all the assets of the company excluding land,
which must be specifically mortgaged. Such assets include book balance, stocks, plants and
machinery and all present and future assets of the Company.
• Mortgage Debenture: It is a charge over the fixed and floating asset including Legal
Mortgage. This is different from All Asset Debenture which is a charge over fixed and floating
asset excluding landed properties.
• Pari - Passu Debenture: This is a situation where a charge is created by separate creditors
ranking equally in priority. It could also arise when a creditor who possesses a first charge on
a debtor’s collateral security grants consent to another creditor(s) to share in the security on a
side by side basis
Pledges
 Created when the borrower makes a physical or constructive transfer of his/her
property to the lender as security until the loan is repaired.
 The lender keeps possession of the property, the borrower keeps the legal title.
 It is the earliest form of security in commerce and widely practiced in Nigeria.
 It serves as security to the lender, as it gives the lender the right to sell off the security
to offset the loan in the case of default.
Guarantees and Indemnities
 A guarantee operates when a 3rd party (guarantor) holds himself out as the one liable to pay
the loan should the borrower fail to pay. The guarantor is the secondary obligor. This is
indirect exposure.
 An indemnity operates when an indemnifier undertakes to repay the facility from inception,
which makes him/her the primary obligor. This is a direct exposure
 When obtaining a third party guarantee or indemnity from an individual, the bank must also
obtain a statement of net worth signed as an affidavit.
 The idea of an affidavit is because a false statement made under oath constitutes the crime
of ‘perjury’ which is punishable by a term of imprisonment.
Other Types Of Securities
Negative Pledge 1 Negative Pledge 4 1
 It however gives the right to bring legal action for

 It does not constitute a security interest in the true
breach of a contractual obligation and use for
sense of the world.
damages.
 It is a commitment by the REPUTABLE borrower not to
 The basis of accepting a negative pledge is the
encumber its assets in favour of a third party by way of
undefaulting integrity of the borrower and its strong
creating a security which has priority over, or ranks
asset base.
parri passu with any of the assets of the borrower
without the knowledge of the other existing lender in
 It however gives the right to bring legal action for
question
breach of a contractual obligation and use for
damages.
 It does not confer rights on any asset of the borrower
but merely restricts its ability to give security to others.
 The basis of accepting a negative pledge is the
undefaulting integrity of the borrower and its strong
 Third parties do not have notice of a negative pledges
asset base.
as it is not registerable
Right Of Set-off 2 Letter Of Comfort 4 3
 A security made possible where the

 This is a quasi-security because no liability
borrower has more than one account in
is attached to such letters.
his/her name or business name with the
lending bank, with the authority to use the
 Usually issued by reputable companies or
credit balance in one to offset the debit
individuals, stating that the obligor is fit and
balance in the other.
proper as a prospective borrower.
 Not a very good security because the
bank’s negligence may lead to all the  For this “security” to be accepted, it is
accounts of the customer being drawn to a advised that it be accompanied by a
level where balances are insufficient to off- tangible security as a back up.
set the outstanding liability.
 Useful for early payment default.

4. Domiciliation Of Payment
 A tripartite agreement between the borrower, the third party liable to pay and the bank
which is advancing the facilities to the customer. It involves the express request of the
borrower to a third party to pay amounts due to him to the lender.
 It is usually taken for short term credit facilities to retail/commercial clients or against
salary of an employee on a loan facility granted to such an employee.
5. Lien On Account
 The customer charges as security for banking facilities his/her credit balance which
could be in fixed or short-term deposit account, current account, savings account or
domiciliary account
6. Letter Of Hypothecation
 It is an equitable charge.
 Operates where it is impracticable to give possession of the goods or document of title to the
goods to the bank. E.g. a customers applies for a banking facility to import goods, which are
charged to the bank as security or to manufacture goods.
 It confers a right in preference to other creditors to have the goods satisfy the liabilities secured
Dangers Of Not Perfecting
 The risks associated with not perfecting security documents include:
 A charge on a company’s assets not registered at the CAC within 90 days of
creation, is void. The bank will need a court order after 90 days to revive the charge.
 The bank would lose priority.
 The documentation provided by the customer could have expired where land is
involved e.g. a lease.
 Should there be default before perfection, the bank will be in the position of an
unsecured creditor.
Major Documentation Errors/Pitfalls
 Failure to perfect security
 Acceptance of forged or cloned documentation
 Inadequate insurance cover
 Failure to ensure listing of the bank as ‘loss payee’
 Inadvertently taking an inferior position relative to other lenders.
 Improperly executed loan agreements
 Absence of properly executed security documents
 Poor financial statements that reveal little or nothing about the viability of project
MODULE 8
Loan Portfolio Monitoring

& Remedial
Loan Monitoring Process
 The loan monitoring process starts with the Credit Control Desk of the Bank before the
disbursement by Credit Administration Unit.
 The Credit Control Desk checks through the approved credit and ensures it is in line with
the stipulations of the Bank’s Credit Policy Guide as per target market, risk acceptance
criteria, security, lending approval limits, minimum risk adjusted return, satisfactory account
operation, etc.
 Emphasis is also placed on Completeness of Documentation and Security. The Legal

Department sees to this.
 Once the loan is disbursed, it forms part of the portfolio of loans being monitored by the
Relationship Team and the Loan Monitoring Department.
Monitoring & Reporting
 Monitoring is a crucial aspect of loan management
 It is a function of both relationship management and risk management
 It can be in form of observations
 From reviewing the customer ‘s account
 Attending social events – birthdays, children marriage ceremonies, naming ceremonies etc
 Visiting the plant/premises, and holding discussions
 From reading newspapers and magazines
Monitoring & Reporting
 Note in credit file:  Risk Management ’ s periodic reports, typically
 Observations made during plant and monthly, will include comprehensive reports on all
social visits the facilities, showing the following:
 Classification
 explanations given by the customer when
 Limit
asked about cheques drawn against
 Amount borrowed
insufficient fund (if any)
 Current Balance
 Newspapers cuttings should be filed  Provision made
 Make all these available to risk management  Collateral held and value, Loan-to-value,
department whether LM or EM, if fully perfected,
 The bank should have a periodic reporting insurance status
programme  The branch should also hold meetings to review all
credit facilities and agree on actions to be taken to
 At least a monthly report is required, showing secure the repayment of non-performing facilities
ALL credit facilities, their balances, agreed  Reporting is about communication and is a key
limits and expiry dates aspect of credit management
Loan Monitoring Process
 At the Portfolio Level, the Loan Management Officers have tools to generate reports that include the
following:
 Unapproved Credits
 Expired Limits with Outstanding Balances
 Loans and Leases with Repayment of Principal and Interest in Arrears
 Facilities Disbursed before Conditions Precedents are met
 Facilities with Deferrals, and Uncured Deferrals
 Future Maturities Report
 Unfunded Accounts for Clearing Cheques. With this report, the Loan Officer can direct the
Clearing Department to return a Cheque unpaid with or without the consent of the Relationship
Manager.
 Deal Booked Daily to know who, which and what credits have been booked. Booking Limit
Breaches can be sanctioned with this report
 Future Schedule of Due Rentals on Leases
 Turnover Report to check for performance on liquidity, yield and repayment
Early Warning Signs
When Do Loans Become Problems?
Loans become problems when:  Problem recognition is an anticipatory state of
mind. There are 4 key steps in problem
Bad Credit Judgment recognition viz:
 Good judgment not exercised at
inception 1. Understanding business and financial
 Flaws in structuring risks,
2. Applying sound credit judgment,
Poor Implementation 3. Recognizing industry/ macroeconomic
 Inadequate follow-through/ analysis and risks
implementation 4. Picking up early warning signals
 Defective documentation
 The first 3 keys must be institutionalized and
Borrower’s Deterioration must take place prior to the granting of the
 Deterioration in borrowers management facility.
or competitive/economic environment.  Items 3 & 4 must be part of the monitoring
process of the granted facility.
Identifying Early Warning Signals
Early warning signals are certain observable traits exhibited by a loan that is about to go bad. It takes the
discernment of a loan officer to proactively identify, promptly follow-up as well as escalate the situation for
timely intervention of the management.
The early warning signals can be broken into the following :

1.Account Activity Signals
2.Management Signals
3.Managerial Signals
4.Business Signals
5.Information Signals
6.Income Statement Signals
7.Cash Flow Signals
8.Economic Signals
9.Liquidity Concern and Crunch.

Account Activity Signals 1 Management Signals 2
• Changing Behavior/ Personal Habits

• Frequent Excess Over Limit • Marital/ Gambling Problems
• Inability to Service Interest/ or Principal as and when • Changing Attitudes and Lack of Cooperation
due • Failure to meet Personal Obligations
• Exit or Sudden Withdrawal of a key staff from Contact List
• Sticky account with little or no turnover Inability to Meet Commitments on Schedule
• High incidence of Returned Cheques • Poor Planning
• Excessive Risk Taking
• Failure of Overdraft to Revolve within Cash cycle or • Poor Financial Systems, Records and Control
Terms of the Offer (i.e. lack of swings on the account)
• Neglect of Business
• Reducing Yield on Account to the Bank • Excess Emphasis on New Ventures
• Unrealistic Pricing
• Incessant Request for Temporary Availments above
• Lack of Successor Management
Regular Limit
• Chronic Labor Problems
• Inability to Respond to Changing Market
• Rapidly Growing One-man Operations
• Business Overcomes Management’s Capability
Business Signals 3 Information Signals 4
• Customer Impatient with Enquiries

• Rapidly Changing Business or Industry
• Snubbing Invitations, Rebuffing Telephone Calls
• Poor Use of People/ Resources and Feigning Inaccessibility
• Loss of Key Product Lines, Distribution Rights,
• Delay in Rendition of Financial Statements
or Sources of Supply
• Frequent Unplanned Trips Abroad
• Loss of Significant Customers
• Large Jump-in Orders (Straining capacity)

• Sudden Disappearance or Change in behavior
of Customer
• Speculative Inventory Purchases
• Credit Enquiries by Other Banks
• Poor Maintenance of Fixed Assets
• Reduction in Suppliers’ credits
Income Statement & Balance Sheet 6
5 Cash Flow Signals
Signals
Declining Sales, especially with High
 Declining Sales, especially with High Fixed Cost

 Declining Cash Flow or Deficits
 Rapidly Growing Sales (beyond sustainable growth)
 Acquiring Assets that Represent “ Wants ” as
Against “Needs”
 Rapidly Rising Assets
 Excessive and Growing Debt Service
 Significant Decline in Margin
 Excessive Withdrawals or Payout
 Rising Selling, General and Administration Expenses
 Growing Income with Falling Cash From
 Rising Finance Charge and Exposure to the Industry
Operations
 Overtrading, Increasing Receivable Days and
Increasing Stock Holding Period

Economic Signals 7
 Oversupply Factor
 Inadequate Demand Factor
 Increasing Intra-Industry Rivalry Among the Players
 Changing Technology and Taste
 Recession Vulnerability
 Government Restrictive Policy on the Industry e.g.

Cigarette
 Influx of New Entrants into the Industry

Restructuring & Workout…
CALL IN WORK OUT
 The customer may default for some reason  A proposal for loan repayment brought forward
by the customer
 The bank will take steps to tackle the
problem  The analyst checks the option for viability
 If default persists, the facility will eventually  Final decision for acceptance or otherwise is
be called in. taken by credit committee
 This means the bank makes a full demand
for repayment of the entire outstanding
balance
REALIZATION OF SECURITY
 Should the customer be unable to pay, the
bank resorts to the sale of the deposited
security (realization of security)
Loan Workout Techniques
Loan Workout Techniques depend on the underlying peculiarities and circumstances of the loan.
 Granting of Moratorium on Principal and/or Interest
 Rescheduling of Repayments
 Reducing Interest Rate
 Amending Schedule Repayments to Cash flow patterns
 Rescheduling of Repayments as well as Interval/due dates
 Limits on Reducing Balance Basis
 Enhancements to Working Capital, fresh loans and Use of part-profit to repay loan
Loan Workout Techniques
 Restructuring:
 Overdraft into Term Loan
 Overdraft into Overdraft and Term Loan
 Termination/ Rebooking to cater for longer tenor, reduced principal and interest repayment (i.e.
change in amount, rate, tenor, & repayment frequency
 Conversion of Import Finance Facility to Warehouse Finance Facility
 Conversion of Import Finance Facility to Overdraft or Term Loan
 Conversion of Arrears in Principal and Interest into Term loan
 Substitution of Securities, Release and Setting off Cash Security
 Administrative Effort:
 Write-off of a portion of the loan
 Interest Refund
 Debt Forgiveness
Loan Recovery Process
Introduction
 Non-performing loans seriously affect profitability of the Bank.
 Some borrowers do not follow discipline of payment of their loans and default. Some fail due
to numerous reasons beyond their control. Bank’s growth is retarded if loans are classified.
 Bank must be vigilant to ensure that the loans do not become sticky for which following
measures are very essential: -
 Close monitoring during validity/repayment period of loan.
 Gear up persuasion right from initial stage of its default/non-payment of installments.
 Understanding reasons of non-payment to obviate the problem.
 Constant follow-up with defaulting borrowers. Take effective steps to save the loan from
turning it to NPL.
 Relationship Manager (RM) must try to identify reasons of default of loan non-payment and
find out ways to get the loan recovered/regularized.
Loan Recovery Methods
Beyond good database for all sorts of credits and securities, and adoption of Provisions of the
Prudential Guidelines, the recovery methods (singly or in combination) used by Banks include:
 Moral Suasion and Appeals
 Formal Letter of Demand
 Foreclosure on Collaterals
 Referral to External Solicitors for Legal Action – This takes time and resources
 Reporting to Central Bank of Nigeria, and Credit Bureaux
 Appointment of Receiver Manager to manage or liquidate the coy

Loan Recovery
Depending on the nature of the borrower involved, the style and degree of persuasion shall differ from case
to case.
Ultimate aim is to recover and settle defaulting loan within the shortest possible time at a maximum return for
Bank. Various modes of persuasion are as under: -
Letters & Reminders Cash Credit or Secured Overdraft etc. – Send letters two months ahead of expiry to
confirm renewal or payout.
Non-performing Accounts – Send letter giving 30 days notice for full payment.
Term Loan Accounts – Send letter once an installment remains unpaid urging them to
regularize their account.
Inspection & Site Visits Concerned Branch /RM or Recovery Officers shall collect information regarding
reasons of default through personal contact / visit etc.
Branch Officials/RO shall inspect the shop/factory/residential address of the borrower
to ascertain the position of their business and reason of failure.
They will submit report along with their findings.
Credit Recovery: Phased Management, Rule-based Progress
EARLY PHASE LATE PHASE
FOCUS Focus is on working out a solution in Focus shifts from protecting the customer
cooperation with the customer, giving high relationship to protecting assets and
priority to the protection of the customer minimizing losses .
relationship.
AIM Aim is to minimize the number of cases Aim is to recover the highest volume of
moving through to the later stages . assets possible
Moving from phase to phase must:

 Be predefined  Be clearly stated  Not be based only on  Factor in risk information
DPD
Phased management must allow some space for ad-hoc management but with close monitoring and
control
MODULE 9
Miscellaneous Credit
Issues
• Basel Accord
• Role of AMCON in Distress Resolution
• Credit Registry & CRMS
Basel 1,2 and 3
ACCORD OBJECTIVES :
o Develop a framework that will strengthen financial soundness in banks.
o Introduce strong and reliable risk management practices in the banking sector.
o Ensure global consistency in the application of the accord principles.
Basel
Basel Basel 3
1 2 2018
1988 2004
Comparison Between Basel 1,2 and 3
S/N BASEL 1 (1988) BASEL 2 ( 2004) BASEL 3
1 Considered two risks ( Credit Considered three risk Pillar 1:
Risk and Market Risk) for classes (Credit Risk, Market Enhanced Minimum
capital allocation. Risk and Operational Risk) Capital and liquidity
for capital allocation. requirements.
Quality and level of
2 Adopted a uniform one size fits Asset quality to determine capital considered.
all risk weight on all classes of risk weight to be assigned to Additional 4.4% on
assets without considering asset classes. RWA after deductions.
their quality.
3 Main concern was on minimum Three Pillars introduced Additional 2.5% for
capital requirement . ( 8% for a) Minimum capital Capital conservation
international banks) adequacy. buffer bringing total to
b) Supervisory review 7% of RWA of
c) Market discipline common equity.
d) Three tiers of capital
requirement.
Comparison Between Basel 1,2 and 3 (Contd)
S/N BASEL 3
Countercyclical buffer of 0-2.5% to avoid systemic risk
Pillar 2:
Enhanced Enterprise Risk Mgt. and supervision.
ICAAP requirement.
Address enterprise wide governance and off-balance sheet capital
requirement.
1
Pillar 3:
Enhanced mkt discipline and full disclosure.
Additional buffer for Systemically Important Financial Institutions (
SIFI) to go beyond Basel 3requirement.
2 Liquidity standard.
Definition of Capital
 Tier 1: Core Capital
 Equity
 Disclosed reserves
 Tier 2: Supplementary Capital (limited to 100% Tier 1)

 Undisclosed reserves
 Revaluation reserves
 General provisions/general loan loss reserves
 Hybrid instruments
 Subordinated debt (lower Tier 2)
 Tier 3: Short-term Subordinated Debt

Banking Risk Regulation
 BASEL I
 It is a standardized way for calculating the amount of risk-based capital a bank would
be required to hold.
 The Accord covered only credit risk and the relationship between risk and capital was
not effective considering current standards.
 The capital adequacy ratio was 8%

Banking Risk Regulation
BASEL Il
 The risks covered under the new Accord are
 Credit Risk
 Market Risk
 Operational Risk
 ‘Other Risk’
The Organization Of The New Accord
Three Basic Pillars
Minimum Capital Supervisory Review

Market Discipline
Requirements Process
AMCON
AMCON is an emergency bank rescue vehicle. The purpose of such a vehicle is to intervene just within
a period of time to resolve banking challenges and not to be the toxic loan tunnel arm of the CBN or the
existing commercial banks. Inspite of obvious shortcomings of AMCON, here are some of its itemized
achievements.
NPLs
 AMCON acquired over 12,500 Banking sector NPLs worth N1.845 trillion (Discounted Value of $11.6
billion within set deadlines.
 AMCON purchased over 95% of NPLs in the industry with banking sector NPLs at less than 5%
 Restructured N600 billion ($3.85 billion) of NPLs acquired in 2011
Bridge banks
 AMCON acquired three bridge banks – Mainstreet (Afribank), Keystone (Bank PHB), & Enterprise
(Springbank) and have sold off two of them.
Discussion
CREDIT RISK MANAGEMENT AND BANK FAILURES
The Case Of Polaris Bank
• Trainees should discuss the credit and risk management issues that could have led
to the collapse of Sky Bank (Now Polaris Bank)
• What should the bank management be doing now, in order to rise above their
current challenges.
Credit Registry And The CRMS
 Credit registry assists banks in making their credit decision
 Using available data from the registry, banks can identify borrowers with questionable
credit histories
 CBN Credit Risk Management System [CRMS] or Credit Bureau was established by the
CBN Act No.24 of 1991 [sections 28 and 52] as amended
 All banks subscribe to the CRMS.
 The CRMS provides a database of borrowing customers and their performance on
borrowed funds
 Presently the CRMS is web-enabled thus allowing banks and other stakeholders to dial
directly into the CRMS database for the purpose of rendering the statutory returns or
conducting status enquiry on borrowers.
 Also, it is the focus of CBN to integrate the CRMS with other systems operating in the
bank to make it more efficient.
Objectives of CRMS
 Strengthen the Credit Appraisal Procedures of Banks
 Storage and dissemination of Credit Data
 Monitoring of Over-Exposure to Borrowers under the single obligor limit
requirement: The consolidated credit information generated by the Credit Bureau will
enable banks to identify borrowers who have contracted debts in excess of their
repayment capabilities.
 Banks are thus put on notice to avoid putting their funds into areas or sectors that are
already experiencing a lull or declining prospects. It will also assist banks in the
evaluation of the viability or otherwise of proposals on loans from customers.
 Facilitating Consistent Classification of Credits: The Credit Bureau will facilitate
regulators ’ consistent classification of credits granted to the same borrower(s) by
different banks.
 The Regulator will also have first hand information on a customer’s global debt profile
thereby eliminating the erroneous classification of a customer’s loan as performing in
one bank and doubtful or lost in another bank
Credit Registry
“Credit Bureau” (CB)/Credit Reference Company - means an institution that collects
information from creditors and available public sources on borrower’s credit history. The
bureau compiles the credit information on individuals/entities regarding their credits, credit
repayments, court judgments, bankruptcies etc. and then creates a comprehensive credit
record that may be sold to lending institutions and other authorized users.
CRC Credit Report
A CRC Consumer Credit Report includes Information on:
 Personal Details (Name, Date of Birth Gender) & ID Details

 Address History
 Employment History
 Details of Inquiries made on your credit file (Who Inquired, When was the
Enquiry Made)
 Credit Facility History
 Security Details
 Suit Filed Details
 Dishonour of Cheque Details
Credit Ratings
WHAT THEY ARE ? WHY RATE ?
A CREDIT RATING is an opinion of  It helps the lender or investor to ascertain the

suitability of the obligor or an issuer of a bond
 - the future ability,
 - legal obligation,  Fund managers with fiduciary responsibilities (e.g
trustees) are able to easily satisfy restrictions on
 - and willingness types of investments that they can make
of a bond issuer, a creditor or other

 It introduces new issuers to the market. Even a
obligor to make full and timely well known local issuer (e.g NB plc) may benefit
payments on principal and interest from a rating to raise money abroad
 A lending banker can better quantify his risks
due to investors.
 The lender can manage his portfolio appropriately
Credit Rating Criteria
Financial Capacity to meet Transaction Transaction
Rating Score
Condition Obligations Dynamics Cash Flows
Investment AAA Over 89% Impeccable Overwhelming Excellent Overwhelmin

Grade or g
Strong / Good AA 80% – 89% Very good Very Strong Very good Strong
Credit Rating
A 70% – 79% Good Strong Good Good
BBB 60% – 69% Satisfactory Adequate Satisfactory Adequate
Below BB 50% – 59% Deteriorating Based on Weak Weak
Investment Refinancing ability
Grade (High B 40% – 49% Weak Weak Weak Weak
Yield/Junk) or
Weak Credit CCC Below 40% Very Weak Based on external Very Weak Very Weak
Rating support
D In default
R Instrument with significant non-credit risks

NR No rating requested, there is insufficient information or does not rate a particular
obligation as a matter of policy

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ACCESS BANK PLC

ENTRY LEVEL TRAINING

Life Perspective: A good knowledge of Credit Analysis

Career Perspective: Given that the sustainability of the

Bank’s Perspective: The bank takes Credit

At the end of this programme participants should have a working knowledge

 The importance of Lending in the bank’s business

 To check for profitability of loan transactions

 Structure and Monitor loan performances

 How to determine loan delinquencies

They should also know how to:

 Apply financial and accounting knowledge hitherto acquired to take good

Principles of Lending. Merchant of Venice Case Study. Canons of Lending (Cs

Credit Risk Analysis. Risks inherent in Credit Products. Identifying Risks

 PROFITABILITY Vs SOCIAL RESPONSIBILITY.

 ‘THE PERMISSION TO DELAY PAYMENT FOR GOODS OR

 ‘THE STATUS OF BEING TRUSTED TO PAY MONEY BACK TO

Obligation Primary Obligation Secondary Obligation Secondary Obligation

Overdraft, Term Loans, Commercial paper. Banker’s Advance payment guarantee,

Attributes Personal Banking Business / Commercial Banking Corporates

 BANK’S EXPECTATIONS OF THE BORROWER ARE:

 What is the borrower’s networth?

 An objective and unbiased disposition.

 Thoroughness and an eye for details

 Focus on the profit equation (P=R-C)

 Ability to withstand pressure or temptation to book poor quality loans in order to

 Sample FAM, Facility Approval Memorandum

The Environment of Credit

Exchange Budget Consumer

 Demand shock - an  Supply shock - an event that

 Monetary policy – manipulation of the money supply

 Deficit stimulates the economy because:

Co-cyclical Industries Non-Cyclical Industries

Sinking Fund 1.88

Non-Oil Revenue Debt Service

– Common services, i.e. banking; insurance; hotels

3. Financial  Interest is a fixed cost

Quote from Peter Lynch in ‘One Up’ on Wall Street:

" Many people prefer to invest in a high-growth industry,

“An industry’s profit potential is largely

… competitive strength high when

* The number of competitors increases or they become equal in

As rivalry among competing firms intensifies,

Two producers or suppliers in the market. Characterized by action and reactions. A

Highly competitive market. Highly level of product differentiation. Chances of any of

1. Bank loans are seen as getting a share of the ‘national cake’.

Review Merchant of Venice Case Study

• The borrowing could be:

Lending for unjustified purpose or Proper Analysis is not done, and

 It requires close monitoring and guidance for  Monitoring difficulty

 Veracity of underlying cash flow

TIME LOAN TERM LOAN

 It involves regular payment of principal

 Rates could be fixed or variable (e.g.

Operating Lease Finance Lease

 LPO financing is similar to Inventory  The bank has a claim on the

State Governments are also eligible.

 Enterprises with high employment  The project must be technically feasible,

 Cottage Agro Processing Fund  Rice Intervention Fund (NGN10bn)

 Dangote-BOI fund (NGN5bn)  Sugar Development Council Fund