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1. Agenda for Day 2
Financial & Ratio Analysis
Subjective Analysis
Lunch Break
Case Studies
Open Session/ Q&A
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 1

2. The following subjective parameters need to be assessed
Business Risks
Industry Risks
Management Risks
Project Risk
Conduct of Account
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 2

3. Business Analysis
Business Risk • Customer quality and concentration
• Supplier reliability and concentration
• Order book position
• Competition impact on GP margin
• Industrial/employee relations
IM aCS 2010
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For Classroom discussion only Page 3

4. Credit proposal should analyse the suppliers and its impact on
the business
Details of Suppliers
Local Within the State Outside the State
Where are they located
How many suppliers does the
Name Period of Location
borrower depend on Association
Names of the top three suppliers
Terms of Purchase Cash Purchase (%) Credit Purchase (%)
Average credit period from suppliers
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 4

5. Credit proposal should analyse the customers and its impact on
the firm
Details of Customers
Local Within the Outside the
Location of customers State State
Terms of sale
Cash Sale (%) Credit Sale (%)
Average credit period to customers
Number of customers Percentage of Credit
Name
Percentage of sales to top three total sales period
customers
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 5

6. Industry Analysis
Industry Risk • Cyclicality of the industry
• Seasonality
• Regulatory framework (dependence on)
• Technology dependence
• Environmental impact
• Demand-supply situation
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 6

7. Bank view on major industries that should be disseminated to
all officers
Advantages: This enables
Common risk perception
Standardised analysis
Requirements: This implies
Standardised Report formats
Updates to ensure timeliness
Dedicated Manpower to enable creation of a bank-wide view
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 7

8. Standardise the Structure and Contents of Typical Industry Report
at Bank; Prioritise reports
Industry reports should enable officers understand key success factors
for the industry: Some of the latest reports are fairly detailed and provide
a good insight into the industry
Suggested Report frequency
Main Report: One comprehensive report annually
Mid-term Report: One mid year review
Flash report: In case of major developments
Industry Reports should be prioritised based on
Banks existing credit exposure
Lending proposals in hand
Banks existing NPA exposure to be restructured
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 8

9. Industry Reports should enable officers understand the
following key factors
Demand-Supply Scenario
Competitive Position of the borrower
Sources of Price Volatility
Cyclical nature of the industry
Terms of Trade
Suppliers
Customers
Regulatory/ Fiscal Environment
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 9

10. Credit proposal should analyse the supply/ demand scenario of
the business
What is the current & projected demand supply position of the
product?
Is demand/ supply seasonal?
What is the demand supply situation in international market?
What are factors which affect the demand supply situation of the
product?
How these factors are likely to change in near future?
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 10

11. Credit proposal should analyse the competitive position of
the firm
How many competitors does the borrower have in the same geographical
area of operation
How does the borrower rank vis-à-vis the competitors
Strong Average Below Average
Is oversupply likely to affect margins
Yes No Sometimes
How aggressive is competition? High Low
What are the chances that the business will fail due to inability of the
borrower to sell the goods?
High Low
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 11

12. Credit proposal should analyse the sources of price
volatility of the product
Is it a commodity or branded product ?
How many players are in the market and what is the market
concentration ?
What is the price relationship between international & domestic
markets?
What is price volatility in international/domestic markets ?
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 12

13. Recommendation - Credit proposal should analyse the
cyclicality of the business
Is the business cyclical?
Yes No
How volatile is the cycle?
High Moderate Low
What is the current stage of the business cycle?
Ascending Peak Descending
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 13

14. Credit proposal should analyse firm’s dependence on
regulatory/fiscal concession
Is the industry dependent on fiscal concessions?
Is any change expected in the government policy?
What will be the impact on the borrower due to such changes?
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 14

15. Management analysis
Character
Integrity
Business Commitment
Credit Track Record
Capability
Financial Strength
Competence
Management Risk Business Experience
Firm’s age
Reputation with customers/suppliers
Organisation
Internal Control
Employee relations / Quality
Succession Planning
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 15

16. Clearly address issues of management competence and
reputation
Examine competence of key managerial persons and highlight changes
in management, if any
– Do the key managerial persons have adequate qualifications and
experience to manage their responsibilities?
– Has the management changed? What is the impact of such change?
Market knowledge on borrower: For independent reports, it is
important to mention the connection of informer with the applicant
– What is the relationship of the informer with the applicant?
• Customer, supplier, lender, competitor
For associates, opinion of other banks should be taken
– Is the account performance of associates satisfactory? IM aCS 2010
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For Classroom discussion only Page 16

17. Address the issue of management succession
Succession could be classified as follows
Well-defined succession plan in place; business not dependent on one
person
Business dependent on one person at present, but in the event of
incapacitation of that person a good succession plan is in place
Succession is not addressed adequately and hence dealing with a
change in the management team could adversely affect the company’s
performance; however the damages can be contained
Succession has not been addressed and in the event of incapacitation
of the key person, the business would suffer financial setbacks
Current management is strong, but any change would impair loan
repayment. This selection requires further explanation in Independent
report to justify credit extension.
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 17

18. Comment on the capability and competence of management
Competence could be classified as follows
Management is exceptional. Tasks are consistently performed in an
efficient and effective manner.
Management is very good. Person is well organised and knowledgeable
about the company and the industry in which he operates
Person has generally acceptable management skills but weakness in one
or two critical areas is evident. Tasks are generally performed
satisfactorily.
Person exhibits limited managerial qualifications. Individual is not
decisive and does not have a clear understanding of the company or its
industry.
Person exhibits a total lack of skill. Decisions are illogical and loan
repayment could be at risk.
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 18

19. Comment on management track record in meeting its commitments
Compliance could be classified as follows
Company has never violated any term and condition of its loan
agreement
Company rarely does not meet all terms and conditions of its loan
agreement
Company meets all major loan covenants but from time to time may fail
to comply with minor ones
Now and then the company breaches a significant term or condition of
the credit agreement
Company consistently violates loan agreement covenants
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 19

20. Project Analysis
Status of Project clearances
Status of Financial Closure
Percentage of Project Completion
Track record in Project implementation
Infrastructure availability
Type of construction contract
Contractor risk
Legal/regulatory environment
Market for project output
Project Risk Score
Design/technology risk
Ability to handle projects in hand
Force majeure risk
Project DSCR
Project IRR
Sensitivity analysis
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 20

21. Conduct of Account - Monitoring parameters
Number of times lower of DP/ Limit overdrawn
Cumulative number of days lower of DP/ Limit exceeded
Number of days interest overdue
Number of cheques/ bills payable by the borrower
returned
Number of LC/BG issued in favour of buyer
devolved/invoked
Delay in submission of renewal proposal/statements by
Conduct of Account borrower
Variance in projected sales Vs. actual sales
Delay in rectification of inspection irregularities by
Parameters
borrower
Delay in compliance with sanction order conditions by
borrower.
Credit summation/sales- excluding cheques returned
Delay in submission of Audited Balance Sheet to Bank
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 21

22. Judgmental and Quantitative Model – What is the
relation?
Industry Risk
Financial Risk
Lending Decision
Management Risk
Business Risk
Project Risk
The Quantitative Risk model would be based on historical data and expert opinion
attempt to mimic the credit risk assessment of a credit risk officer
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 22

23. The quantitative model would derive its strength from the Bank’s
data and the human expertise and experience of Credit Officer
Library of explanatory financial variables
Based on bank-specific data
Statistically explanatory set of variables
Calibration & Normalisation
“Weights” by statistical
techniques
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 23

24. DISCUSSIONS
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 24

25. All the contents of the presentation are confidential and
should not be published, reproduced or circulated without the
written consent of IFC, Bangladesh Bank and IMaCS.
IM aCS 2010
Printed 11-M ay-11
For Classroom discussion only Page 25