3. Credit
Credit is a contractual agreement in which a
borrower receives something of value now and
agrees to repay the lender at some date in the future,
generally with interest. The term also refers to the
borrowing capacity of an individual or company.
4. Improving MSME Performance through Cleaner Production.
Module 8: Financing CP. Visit www.encapafrica.org.
3
Possible funding Channels for Business
Commercial
Banks
Company
Shareholders
(equity offering)
Partners/
owners
Leasing
companies;
equipment
vendors
Government-
subsidized
credit
International
Development
Assistance
• Environmental revolving
loan funds
• Development banks &
credit schemes
• Ex/Im finance guarantee
schemes
Internal sources
Commercial
sources
Public/ODA sources
Cash
reserves
Credit cooperatives/
unions
Customer
firms
5. Commercial Banks
Acquire funds by receiving money from
savers: savings accounts, deposit
accounts, etc.
Provide funds to borrowers through term
loans, lines of credit, bonds, etc
The interest payments on loans are used
to pay interest to depositors & are a
primary source of profit for the bank
To be profitable/sound, commercial
banks focus on: maximizing their
returns & minimizing the risks they
accept
6. 8
Commercial bank loan procedures
Commercial
banks’ loan
procedures
have 4
basic
stages
Application
Review
Award
Paying
back, with
interest
failure
1
2
3
4
We will examine
at each stage in
more detail
applicant prepares proposal
and submits to bank
Bank evaluates
application and sets
or negotiates
conditions
7. Credit Investigator
Financial professional.
Expertise in evaluating the
creditworthiness of individuals and
businesses.
Determine the likelihood that a borrower
will be able to meet financial obligations
and pay back a loan,
By reviewing the borrower's financial
history and determining whether market
conditions will be conducive
to repayment.
8. Process of Credit
Investigation
The credit investigation generally begins on receipt of memorandum
from the loan officer, which outlines pertinent information in
connection with the proposed loan gathered during the visit to the
applicant, and the scope of additional information required.
When the memorandum concerns a customer who is currently
borrowing or who borrows occasionally it can be reasonably
assumed that information in the credit file is current. Most
progressive bank in order to maintain current information particularly
in case of borrowing accounts follow the practice of maintaining a
tickler or reminder file so that at least once a year at the close of the
fiscal year the customer is asked to provide current figure so that the
file can be revised and borrowed up-to-date.
Generally, after such revision the file is reviewed by the credit
analyst. Should the new information indicate changes in the financial
position or operation of the company which could possibly affect the
relationship, such changes are discussed with the officer to whom
the account is assigned.
9. Status of Credit
If Credit File,
When the memorandum concerns a customer
who is currently borrowing then we can use a
credit file. Credit file if properly prepared and
kept current provide the loaning officer with the
essential information outside perhaps of an
interim statement which enable them to promptly
reach a decision on loan applications received
from frequent borrowers.
If Not Credit file
If, however, there is no credit file, or if there is a
file and information is stale, the credit
investigator undertake a new and complete
investigation to which the credit investigator
refers.
10. Functions of Credit
Investigator Compare liquidity, profitability, and credit histories of individual or company being
evaluated with similar establishments to determine risk.
Compile reports regarding finance and credit data.
Analyze the financial records like earnings, savings, payments and purchase of
the company or individual and recommend other useful financial activity for further
plans.
Manage files and records, stenography and transaction and other office
procedure.
Complete loan applications, including credit analyses and summaries of loan
requests, and submit to loan committees for approval.
Review individual or commercial customer files to identify and select delinquent
accounts for collection.
Reconcile customer statements/billings.
Minimize bad debt risk and maximize accounts receivable collections.
Conduct collection calls and customer visits to collect Accounts Receivables.
Market, train, counsel, advise, and communicate credit department policy and
procedures to company personnel.
Generate financial ratios, using computer programs, to evaluate customers'
financial status.
11. Sources of credit investigation
The applicant interview
Financial statements
The bank own record
Credit agency reports
Other banks with whom the applicant
maintains account.
Business concerns who sell the
applicant
A visit to the plant or office of the
applicant
12. The Applicant Interview
He also discuss the present operation of the
business and asked the pertinent questions
regarding sales and management.
Determines what use is to be made of the
funds
The method or schedule of repayment
If collateral securities is to be required under
the circumstances how it is to be delivered.
Following the initial interview the loaning
officer makes a notation in the file or prepares
a memorandum covering the request for the
loan.
13. Financial statements
The statements, must be complete,
accurate, and sufficiently detailed.
They should be supplemented and
supported by such additional schedule
and explanatory data
Balance Sheet
Income Statement
Cash Budget
Comparative analysis
14. Balance Sheet
Assets should be neither understand or overstated.
Fixed asset in particularly should, by applying disclosed
reserves, reasonably reflect current values.
Account receivable this may show amount and the
age of receivables, Account Receivables must disclosed
the accounts which are current, and those which are
delinquent or should be charged off, according to the
general understanding in the trade.
Inventories both raw materials and finished products,
should reflect, under proper reserves have been setup,
values at which respective inventory items could be
currently and reasonably liquidated.
Liabilities should be fully disclosed, including actual
figures together with an estimate of any liabilities which
might be contingent upon future performance, pending
law suits on tax liability.
15. Profit and Loss Account:
The loan application should also be accompanied
by a profit and loss statement for the current period
or the most recent period which is ended, showing
the volume of business, the various profit
percentage and reconciliation of surplus or net
worth with the previous period.
Cash Budget forecast:
Estimate of net sales, cost of sale other
disbursements and net receipts or to make or
to make it simpler a statements of estimated
income expense and profits
16. Questions Regarding Financial
Statements
Question Regarding account receivable
Are bank accounts reconciled by someone other than
the person who authorized disbursement of funds?
Are personnel who handle customer ledger and
collection of charge account separate from sales and
shipping departments?
Are account receivable are periodically aged? Are the
aging properly reflected in the balance sheet submitted
to the bank?
Are the credit policy of the company adequate in
connection with economic condition?
Is their effective cooperation between sales department
and credit department
Is sufficient credit checking is undertaken in connection
with the new customer in order to avoid bad and slow
accounts.
17. Questions Regarding Financial
Statements
Question regarding Cash
Are personnel of the subject firm who
handle or have access to money
properly bonded?
Are controls set up over expense
accounts to prevent cash from being
extracted for unauthorized purposes?
Are proceeds from the sale of waste and
by-products properly accounted for?
Are deductions from remittances of
commissions properly verified?
18. The bank’s own records
It is a practice in some banks to maintain
a file or record which they refer to as a
certain file of information. Sometimes
this consists of a form on which is noted
the various relationship a person
maintains with the bank.
An alert credit investigator, who is also
astute, will, after making a check of the
sources of information within the bank,
summarize his findings and file it in the
credit file for future use and reference.
19. Credit Agencies
The principle services rendered by such agencies are in
connection with reporting on the:
History of enterprise- date organized or founded.
Corporate set-up- class of stoke- debt.
Type of operation-manufacturing- wholesale-retail.
Management-title-ages-background-directors-officers
Financial position-balance sheet-profit & loss figures.
Real estate holdings.
Liabilities-claims-or judgement.
Purchasing terms
Selling terms
20. 5 C’s of Credit Analysis
Capacity Is the ability to repay the loan
Capital is the money you personally have
invested in the business and is an indication
of how much you have at risk should the
business fail.
Collateral, or guarantees, are additional
forms of security you can provide the lender.
Conditions describe the intended purpose of
the loan.
Character is the general impression you
make on the prospective lender or investor.
21. Other banks with which the
applicant maintains accounts:
Where a business firm or company
maintains accounts with more than one
bank
Where company or business firm changing
banking relationships
Where an investigation of a company or
business is being undertaken with a bank in
connection with a credit inquiry received
from the bank’s customer or another bank.
22. Other banks with which the
applicant maintains accounts:
In case of company
Is the management capable, conservative and morally responsible?
Is borrowing continuous?
What is the date of the last financial statement filed with the bank?
What other banks have the accounts?
Have accommodation ever been refused? Why?
Have accommodations ever been unsecured?
What class of assets were pledged as collateral security?
Have borrowing been seasonal?
What range of balances is maintained in the account?
Are overdrafts permitted? Under what circumstances?
Have cheques been returned for insufficient funds?
When (date) was the company or business established?
Are they connected with any other business?
Is the company controlled by another?
When did the bank last investigate the name?
23. Other banks with which the
applicant maintains accounts:
In case of Individual
How old is the individual?
With what company or enterprise is he
connected?
What is his present position?
What is his annual salary or income?
Does he have any other source of information?
Does he own his own house?
Is he considered to be a solid citizen?
Would you consider him responsible for the
amount of accommodation requested?
What is the condition of his health?
Is he prompt in meeting his obligation?
24. Business Concerns who sell
the applicant:
How long have they been selling the subject?
What amount of credit is extended?
How are bills paid?
If not paid according to the terms, what is the
reasons?
What is the general condition in the trade?
How do you regard the management?
Is management conservative or speculatively
inclined?
What other concerns are selling to subject?
25. A Visit to Plant
History
Method of operations
Subsidiary or affiliated businesses
Other banks connections
Credit extensions and borrowings
The current balance sheet
Profit and loss statements
Management detailed
Credit agency reports & trade comments
Concluding remarks
26. Case Study:
Azam Ltd, an Engineering company
Azam Ltd. Company was incorporated in year 1950, three
years after the independence of Pakistan in 1947. Setup by
an entrepreneur migrated from India and was the pioneer
light engineering products company. Within a period of fifteen
years it became leader in light engineering goods
manufacturing with the help of European & American
technology and their team of engineers to produce High
Quality Air conditioning, Electrical goods and Building
materials. The industry is set up at C-1, 352, Sector 16-B
North Karachi Industrial Area. Company is currently doing
business with Habib Bank and the UBL Bank. State
Engineering Corporation (Pvt) Ltd is the associated
company of Aam Engineering ltd.Mr. Mairaj Anees Ariff has
been appointed as Managing Director/CEO, Azam
Engineering Company Limitedin place of Mr. Azam. Following
are the members of BOD.
27. Azam Ltd. Company
Profit and Loss Account
for the Year Ended 31st Dec 1991
Description 1990
Rs. Amount
1990
Rs. Amount
1991
Rs. Amount
1991
Rs. Amount
Sales 1600,000 1400,000
Gain on sales of
Investment
------------- 20,000
Gain arising from change
of accounting basis for
long term contracts
------------- 90,000
Total Revenue 1,600,000 1,510,000
Less Expenses:
Wages 400,000 370,000
Material 900,000 880,000
General Expenses 260,000 (1,560,000) 250,000 1,500,000
Earnings before Taxes 40000 10000
Taxation (20000) ----------
Net Profit 20,000 10,000
28. Azam Ltd. Company
Balance Sheet
As on 31st Dec 1991
Equity 1990
Rs.
1991
Rs.
Assets 1990
Rs.
1991
Rs.
Share Capital 300,000 300,000 Freehold Property 224,000 224,000
Capital Reserve
(Property
Revaluation)
70,000 70,000 Equipment( at less
depreciation)
200,000 160,000
Revenue Reserves 78,000 88,000 Unquoted
Investment at cost
60,000 --------
11% Debentures 200,000 200,000
Current taxation 20,000 --------- Stock Material 108,000 40,000
Finished goods
and Work in
Process
88,000 82,000
Sundry creditors 422,000 394,000 Uncompleted
contracts
320,000 392,000
Bank overdraft 270,000 288,000 Sundry Debtor 360,000 442,000
Total Equity 1,360,000 1,340,000 Total Assets 1,360,000 1,340,000
29. Continue
The Company has currently has overdraft facilities of
Rs.320,000 with the habib bank. The borrowings are
secured by a floating charge over the company’s
assets. On Sep, 25 1991 the borrowing facilities are
fully utilized and the company request the renewal of
facility for a further period of six months
Managing director explain the request
We had a bad year up to June 1991. We suffered
from the power shortage and material shortage and
we faced the general inflation which put up our cost.
Consequently our total sales were down and these
were inevitable consequences for our trading results.
30. Detailed Comments
Suggestion
Bank should take careful decision before the
renewal of the facility for a further period of a six
months. Bank should give the loan half of the
requested amount by a company, and doubled the
collateral, and say the company to improve your
debt ratio to further extend the half amount of your
sanction loan.