STRATEGY
· Loan Management Strategy is implied by the following analysis already completed by the lender;
· Identified the risks associated with the borrower’s Industry.
· Identified the risk associated with the borrower’s company.
· Assessed management’s ability to manage risk by;
o Analyzing financial statement trends.
o Evaluating how the borrowers business actually works
· Prepared the projected assumptions covering the entire life of the loan.
· Structured the loan to include terms & covenants to protect the bank against the risks identified.
· Monitor actual account & business performance.
· Compare actual performance with expected performance.
· Determine whether the variations from expected performance is good or bad.
· Reaction
o Do nothing.
o Demand immediate repayment (if your loan agreement permits)
o Renegotiate the terms.
o Look for further opportunities of lending where performance is higher than expected.
Loan Documentation
· Document is a written evidence & Proof of the terms & conditions of a transaction which covers accountability, performance, legal implication and undertaking to accomplish the agreed contract.
Purpose of Documentation
· It is a mean through which we can manage the safety & security of investment activities and at the same time it binds the various customers.
· It includes certain covenants which gives you a right to take action if performance deteriorated to levels that increase risk to a level to warrant taking action.
· Loan documentation, however will not cover every eventuality and lender will need to establish other systems to monitor
· The key however, is what is happening to the customer , the documentation is only protection , if you don’t see what is actually happening there you want buy yourself a maximum time to take action.
Monitoring
· The key to successful loan management is a routine monitoring that you do every day, every week, every month or every quarter for each loan
· The frequency of monitoring activities is determined by how quickly something could go wrong.
· The first step in your loan management is to monitor information about your borrower
· The three major information sources are the ;
· Bank
· External Sources (suppliers, other financial institutions)
· Borrower.
Information from the Bank
· Loan Activity
o Exception & turnover reports
o Maturing Loans
o Past due loans
o Loans with exceptions
o Extension reports
· Current Account Activity
o Overdrafts & drawings against un cleared effects
o Account activity analysis
External Sources of Information
· Trade Enquiries From Suppliers
· Credit Enquiries from FIs
· News Papers etc
Information From the Borrower
· Much of the information you receive about the borrower will come from the borrower themselves
· Most lenders find that informal visits with the borrower –a quick lunch, a drink after work , a trip to play or sports event –can nurture open communication between lender & borrower
· The important relationship that you are building with the client may lead to more business in good times and give you the insight you need to make good decision in bad times.
· Many borrowers will come to the bank to talk to you when want to request an advance or make a loan repayment. This is an ideal opportunity for the banker to talk about how the business is doing
· Visiting the plant or Company
· Analyzing the financial statements
Identifying the Trouble Signs
· Information from the Bank
o Unexpected or excessive borrowing.
o Special clearances
o Unexpectedly prolonged borrowings.
o Excesses against overdrafts or withdrawal against unexpected effects.
o Unexpected cash balance decline
o Decline in loan activity or account turnover.
o Unusual Activities
· Information from other Sources
o Unusual numerous enquires.
o Customer stop taking advantage of trade discounts
o Enquiries from other financial institutions.
o Failure to meet other financial obligations.
o Lawsuits
o Liquidation
o Adverse news about the industry
o Labour unrest
· Information from the customer
o Large or unexpected borrowing requests.
o Inability to meet commitments on schedules.
o Recurrence of problems presumed solved.
o Poor financial house keeping.
o Change in Management.
o Late or incomplete financial statements.
o Change in Auditors or accouting policies.
o Adverse information
o Non Compliance with terms of loan agreement.
o Low cash balance.
o Slowdown in debtors.
o Excessive stocks
o Increase in Speculative assets or outside investments.
o Increase in trade creditors.
o Increase in borrowings.
o Deteriorating appearance of plant.
o Discouraged or demoralized employees
o Overstocking.
o Damaged or obsolete stocks
Strategy for Problem Loans
· Review the Loan
o Once you have spotted the trouble sign, first review the current status of the loan and check your security .
o Look at the credit file and other sources of information concerning the status of the loan.
· Contact the Customer
· Find out the actual reason.
o Sometimes a possible trouble sign turn out to be nothing but a minor, e,g a loan repayment was delayed due to an oversight or the book keeper was sick.
o However incase of a serious problem, Co;s most current financial performance and revised projections must be asked for
Re-structure the Loan
o Once you determines that the bank’s loan may be in jeopardy, following steps must be taken;
o Inform to the Supervisor
o Draft a recovery plan as per circumstances
§ Initiate legal proceedings if customer has completely defaulted.
§ Renegotiate the terms & conditions of the loan according to the revised projections
