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Applying Credit Risk (Lending to corporate and commercial customers…

- - - -  Profitability ratios – the ability of the company to cover its direct and indirect costs and generate sustainable profits.
      -  Liquidity ratios – the ability of the company to have adequate liquid assets available to pay liabilities as they fall due.
      -  Cash flow ratios – the ability of the company to generate enough cash in order to remain solvent.
      -  Capital structure ratios – a breakdown of how the company is financed, broken down into debt and equity components.
      -  Serviceability and repayment ratios – the ability of the company to repay interest and capital to lenders.
      -  Breakeven ratios – operating analysis of the company to ascertain how much a company needs to sell in order to cover its fixed and variable costs.
- - - -  Respectable and trustworthy  Honest
      -  Dependable
      -  Of high integrity.
    - -  The age of the customer – for example, will they be able to repay the borrowing before retirement/would repayment be made before their current contract expires?
      -  What sector is the customer employed in/does their business operate in? Is it stable, expanding or declining? How vulnerable would it be to changes in general economic conditions?
      -  Experience – does the customer have experience in the field that they are looking to get involved in? The examples of the ex-footballer and the self-build are relevant here.
      -  Reputation – have we lent to this customer before? If so, what was their repayment record like? Did they adhere to the commitments and promises that they made to us?
    - - Another way in which you may consider commitment is through any assets that the customer owns and is willing to pledge to the bank as security for the advance.
      - The amount of capital or finance provided by the customer may indicate the customer’s commitment to the purpose of the advance.
    - -  Marital status
      -  Employment
      -  Previous connections with your organisation
      - Dependants
      - Net Worth's of the person
  - - -  The impact of the borrowing on the customer – for example, meeting interest and capital repayments.
      -  The increased expenditure caused as a result of owning the new asset. For example, if we are being asked to help fund a second home, then there are additional costs by way of insurance, council tax, utilities and so on to be met.
      -  Owning the asset may generate additional income.
    - - How stable is the customer’s employment/income source?
      - with a variable interest rate, what would happen if interest rates were to increase?
    - -  Scrutinising the account of an existing customer for salary, SO/DD details
      -  Validate the accuracy of recording of cash deposits – for example, from the maturity of a fixed rate bond
      -  Check records for any arrears in mortgage and/or credit card
      -  Validate any property values
      -  Refer to security records to validate guarantees, etc.
      -  If the customer has a business connection with your bank adequate liaison should be maintained with the appropriate relationship manager
      -  Review of payslips and/or P60 document. You will recall from earlier that we would look for at least three payslips
      -  Validation of the last three months’ bank statements
      -  Seeking independent validation of one off payments – for example, maturity of a life policy, bonus payments, dividends received, etc.
      -  Obtain documentary evidence of substantial deposits held with another organisation
      -  Seek conformation, as appropriate, of material obligations
      -  Ensure that asset ownership is clearly identified
      -  Seek independent share portfolio, property, life policy, pension valuation, etc.
      -  For a self-employed customer seek independent validation (from accountants) regarding recent earnings and business performance
      -  Undertake personal and business Experian/Equifax searches to ascertain financial profile, current outstanding obligations and any potential arrears etc.
    - -  The level of customer background information and financial information that we currently hold and are able to verify independently
      -  Whether it is a new or an existing customer
      -  The purpose of the loan
      -  The amount of borrowing requested
      -  The complexity of the proposal
      -  The structure of the proposal
      -  The amount and type of security being offered
      -  The repayment source
      -  For a new connection, the source of the introduction
      -  The customer’s financial track record.
  - - - Risk & term are the main factors driving rate charged
  - - -  Simplicity of title
        
        security can be completed easily, quickly and cheaply – this is equally important to the discharge, realization or release of the security.
      -  Stability of value
        
        It is also important that a banker can rely on the value placed on a security. The overriding rule here is that you ensure that the margin, or the difference between the borrowing you
        grant and the value of the security is sufficient to allow for a fall in value.
      -  Realisability.
        
        the security ideally must be capable of quick realisation without undue formality. Any delay in the procedures for realisation can increase the possible loss of principal debt and interest.