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Borrower Selection- Primary step of Credit Investigation


Written By: Farhadur_Reza
23/04/2014 10:53 21/04/2014 8:57
Economics

Lending is one of the most important functions of commercial banks. The major portion of income of a commercial bank generates through lending. By lending banks take a huge risk of default on repayment. The risk starts from the first step of lending which is 'borrower selection'. Though a loan may default for various reasons, every credit officers of commercial banks should give their concentration profoundly when they primarily select a borrower for lending. Because a wrong selection may hamper the profitability of banks.

We know Credit Investigation is the assessment of loan proposal from different angles to judge or justify for approval. Borrower selection is the basic and most essential part of credit investigation. Every prudent banker investigates loan proposals to confirm Safety, Liquidity and Profitability of their concern. Among safety, liquidity and profitability, one should not be sacrificed for another.

 

Now the million dollar question is how to select a borrower before allowing any credit facility who would not be defaulter. Though it is near to impossible to declare that a specific borrower will never default because there are lots of grounds exist to default a loan, but banker can curtail the risk by selecting a good borrower.

 

Essential fields to study: Credit officers should study the following fields while selecting a borrower for allowing credit facilities.

a) Person/Man: Person means the man behind the organization. Characters, past record, managerial capacity, educational background, family status, willingness to repay the loan are the ingredients to emphasize. The owner must be a person of integrity, good character, educated, experienced and status. The reimbursement of the loan also depends upon the willingness to pay. The willingness to pay off the loan depends upon the honesty and character of the borrower.

b) Purpose: Purpose of the loan should be productive, legitimate, and fruitful so that the money not only risk-free but also provide a certain source of repayment. If the borrower invests the money in an unproductive or speculative project the advance would be in threat. The advances should not be in one particular track or to one particular industry, because any adversity faced by the particular industry will have severe effects on the bank.

c) Capacity: Capacity includes the business ability, managerial and marketing power of the borrower. The capacity depends upon the borrower's tangible assets and the achievement of his business. The banker should take utmost care in ensuring that the enterprise or business for which loan is sought is sound.

d) Capital/credit worthiness: Credit worthiness is the financial strength, net worth to cover the business risk. Personal Net Worth is also the backup of monetary strength.

e) Collateral: Additional comfort or securities provided by borrower is collateral security. The collateral security must have quick salability or convertibility. It is the insurance or shock absorber to fall back upon in case of demand.

On the other hand it can be said that banker should cover the following six (06) significant factors very sincerely -

 

  1. Managerial;
  2. Organizational;
  3. Financial;
  4. Marketing;
  5. Technical; and
  6. Economic.

 

Sources of information: Before selecting a borrower or to taking lending decision bankers examine the above mentioned fields thoroughly and for that they have to collect lots of information about the borrower. Bankers can collect information from Primary and Secondary sources.

 

Primary Sources:

a. Personal Interview: A personal interview of the borrower in a pleasant and informal atmosphere is very much significant to collect information   which may not be possible through documents or papers. On the event of personal interview banker should not give any commitment regarding the approval of the loan.

 

b. Physical Visit: Visit to the business site, factory, godown is very important to understand business flow of the borrower. To collect some significant information personal visits to firm, organization, business office and project site are very essential for bankers.

 

c. Loan Application form: When a complete and standard loan application form is filled by borrower, primary information like name of the owner, year of establishment, objective, registered address, nature of business, allied or sister concern, securities offered, experience etc. are found here.

 

Secondary Sources:

a. Financial Reports: Financial reports include Income statement, Balance Sheet, Cash Flow statement, Fund Flow statement, Change of Equity statement, Fixed Assets statement and Ratio Analysis. From the financial statements of last/projected 03 years banker gets information regarding sales turnover, profit growth, net worth, asset position, different ratios etc. It is always preferable to have audited financials.

 

b. Account Statements: From the account statements of client sales turnover, yearly deposit, maximum, minimum and average balance can be measured. Moreover a Confidential Report can be collected from the existing banker of the borrower.

 

c. CIB report: Through CIB reports from Credit Information Bureau of Bangladesh Bank, banker’s collects information about borrower's existing loan status with other banks. The borrower is defaulter or not, this information can be known from CIB report.

 

d. Industry/market report: Bankers have to analyze the industry situation where the borrower belongs to. The same kind of businesses may be in decreasing position. Banker should observe the market as well as industry condition before selecting the borrower to allow loan facility. One of the most important objectives of the Industry Analysis is to identify the main sources of competitive forces that lie within the industry and strength of these forces.

 

e. Feasibility report: Through Cost-Benefit analysis, SWOT analysis and Feasibility report of the project banker can take decision regarding borrower. To get the feasibility report bankers must cover six factors including Managerial, Organizational, Technical, Marketing, Financial and Economic factors.  

 

A good borrower should have the knowledge about the following issues.

 

  • How the loan amount can help to achieve the business goal.
  • How much they can afford to borrow.
  • The product matched with the need or not.
  • Repayment plan.
  • Awareness about the cost of borrowing.

 

 

In overall consideration the utmost comment is like that the banker should never compromise credit standards to retain or attract customers and also should remember the popular statement “It’s better to lose the customer than to lose the loan and the customer”.

 

- Farhadur Reza

  BBA, MBA (CU) (Finance & Banking),

  LL.B, DAIBB

 Executive Officer & Credit In-charge

 Bank Asia Ltd. Kamal Bazar Branch, Chittagong


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About Farhadur_Reza

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  • Name: Farhadur Reza
  • From: Chittagong
  • Nationality: Bangladesh
  • Profile:

    BBA, MBA (CU) (Finance & Banking),

    LL.B, DAIBB

    Working at Bank Asia Limited, Kamal Bazar Branch, Chittagong as Executive Officer & Credit In-charge since 2007.

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  • Total Posts: 2
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