Lending to businesses is never easy. The assessment of a bank’s risk is complex with a number of issues that have to be considered which are both internal and external to the business. What is often lacking is a clear process to follow in order to systematically assess these issues from a credit risk perspective. In this presentation, we introduce a framework and a process to enable these internal and external business risks to be identified.

1. Analysing business risks:
An introduction
from
businessbankingcoach.com

2. How do we
define business
risks?

3. Business risks are events that
occur in the business
environment that may result in
unexpected outcomes.

4. But they can also have a positive impact. For
example, the failure of a competitor may result
in greater market share for a business.
Normally, these events are associated with a
negative impact on the business, such as a fall
in profits.

5. So, it’s important for lenders and analysts to
take a balanced view and not to look only
for the negatives.

6. Macro-
Environment
Market-
Environment
Micro-
Environment
Business risks occur in three
distinct business environments

7. This is the big, wide world and everything
that goes on in it that may affect the business
either positively or negatively.
These are the things that the
business can’t control and so
management has to be aware
of what’s happening and be
able to anticipate the change
in the environment and adapt the
business’ operations to suit.
The macro-environment

8. This is the marketplace in which the business
operates and, obviously, has a direct bearing
on its future sustainability. Here the analyst
should consider issues such as products,
target market, competition, suppliers etc.
The market-environment

9. This is the internal
environment of the
business and includes
an analysis of the
experience and quality
of management,
corporate governance,
available resources,
labour, and so on.
The micro-environment

10. Because events in these environments can be
so varied and the environments themselves so
large, we need to take a structured approach to
the analysis and apply a process to ensure that
we cover all the various
possibilities.
We use a credit risk
management
framework……….

11. MICRO-
ENVIRONMENT
Management;
Credit history
Personal characteristics
Contractual capacity
Management, finance,
marketing skills
Technical expertise
Personal assets
and liabilities
Able succession plan
Resources;
Labour
Operational capacity
Premises
Plant & machinery
Forex
MARKET
ENVIRONMENT
Product(s)
Location
Customers
Suppliers
Competitors
Substitutes
Seasonality
Pipeline business
Entry barriers
MACRO-
ENVIRONMENT
Political environment
Economic environment
Social environment
Technological
environment
Ecological (physical)
environment
Legal environment
Non-Financial Risk
or Business Risk

12. Some analysts will prefer to assess the external
environments before looking at the internal
factors while others will do the opposite. The
important thing is to ensure that all three
environments are analysed before moving on to
assess the financial risks.

13. Before embarking on the credit risk
framework there are some background
questions to be asked when assessing
a business…..

14. Who owns the business?
How old is the business?
What is the correct name of the
borrower and is it a sole proprietorship,
partnership or company?
Do the owners control the day-to-day
running of the business or, if not, are
the managers capable, experienced?
What does the business do, in what
industry is it involved and what is the
general health of that industry?

15. I do hope that you enjoyed this presentation.
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