rmpg learning series crm workshop day 2 session 2

IMaCS 2010Printed 11-May-11

For Classroom discussion only

Agenda for Day 2

Financial & Ratio Analysis

Subjective Analysis

Lunch Break

Case Studies

Open Session/ Q&A



The following subjective parameters need to be assessed

� Business Risks

� Industry Risks

� Management Risks

� Project Risk

� Conduct of Account



Business Analysis

� Business Risk • Customer quality and concentration

• Supplier reliability and concentration

• Order book position

• Competition impact on GP margin

• Industrial/employee relations



� Details of Suppliers� Where are they located

� How many suppliers does the

borrower depend on

� Names of the top three suppliers

� Terms of Purchase

� Average credit period from suppliers

Within the StateLocal Outside the State

LocationName Period ofAssociation

Cash Purchase (%) Credit Purchase (%)

Credit proposal should analyse the suppliers and its impact on the business



� Details of Customers� Location of customers

� Terms of sale

� Average credit period to customers

� Number of customers

� Percentage of sales to top three

customers

Local Within the State

Outside the State

Cash Sale (%) Credit Sale (%)

Name Percentage of total sales

Credit period

Credit proposal should analyse the customers and its impact on the firm



Industry Analysis

� Industry Risk • Cyclicality of the industry

• Seasonality

• Regulatory framework (dependence on)

• Technology dependence

• Environmental impact

• Demand-supply situation



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



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



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



� 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?

Credit proposal should analyse the supply/ demand scenario of the business



How many competitors does the borrower have in the same geographical area of operation

How does the borrower rank vis-à-vis the competitors

Is oversupply likely to affect margins

How aggressive is competition?

What are the chances that the business will fail due to inability of the borrower to sell the goods?

Strong Average Below Average

Yes No Sometimes

Credit proposal should analyse the competitive position of the firm

High Low

High Low



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 ?



Is the business cyclical?

How volatile is the cycle?

What is the current stage of the business cycle?

Recommendation - Credit proposal should analyse the cyclicality of the business

High Moderate Low

Yes No

Ascending Peak Descending



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?



Management analysis

� Character� Integrity� Business Commitment� Credit Track Record

� Capability� Financial Strength� Competence� Business Experience� Firm’s age� Reputation with customers/suppliers

� Organisation� Internal Control� Employee relations / Quality� Succession Planning

� Character� Integrity� Business Commitment� Credit Track Record

� Capability� Financial Strength� Competence� Business Experience� Firm’s age� Reputation with customers/suppliers

� Organisation� Internal Control� Employee relations / Quality� Succession Planning

Management Risk



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?



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.



� 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.

Comment on the capability and competence of management



� 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

Comment on management track record in meeting its commitments



Project Analysis

Project Risk Score

� 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

� Design/technology risk

� Ability to handle projects in hand

� Force majeure risk

� Project DSCR

� Project IRR

� Sensitivity analysis



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

borrower� Variance in projected sales Vs. actual sales� Delay in rectification of inspection irregularities by

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

Conduct of Account

Parameters



Judgmental and Quantitative Model – What is the relation?

� Industry Risk

� Financial Risk

� Management Risk

� Business Risk

� Project Risk

Lending Decision

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



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

Statistically explanatory set of variables

Calibration & Normalisation

“Weights” by statisticaltechniques

Based on bank-specific data



DISCUSSIONS



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.

rmpg learning series crm workshop day 2 session 2

Economy & Finance