theories of liquidity management

7/30/2019 Theories of Liquidity Management

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Loan Management 2

(Policy & Operations)

Presented byAmir HossainID: 51018056

Course Name: Bank Fund Management


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Loan SupervisionLoan supervision is the process of disbursing loan to the right people,

ensuring proper utilization of loan and advising borrower by suggesting him

the know-how to improve the financial condition so that the borrower can

successfully repay the loan.

Phases of Loan Supervision1

st

- Before Disbursement2nd - Disbursement to repayment3rd - After the repayment


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Times Spends on Loan Supervision in Different Stages


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Ways of Loan Supervision1. Personal Contacts

2. Periodical Reports

3. Financial Statements

4. Trends of Deposit Balance

5. Collection of Information from those having business transactions with

borrower

6. Collection of variation of statement of planned and actual fund


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1. Provide an objective grading system for loans2. Provide Current portfolio risk info to management & the board

3. Place problem credits under additional securities

4. Evaluate trends in loan portfolio

5. Cite loan policy exceptions and noncompliance with procedures

6. Cite documentation exceptions7. Cite violation of Laws and regulations

8. Assist in development of policy and procedures

9. Act as an info source concerning trends in the portfolio and the banks

economy

10. Ensure that the portfolio conforms to the bank loan policy11. Ensure that management and the board are informed on banks asset

quality

12. Allow lenders sufficient freedom to operate with imagination and

resourcefulness

Essential Areas of Responsibilities and Communication Goals


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1. Personal Surety

2. Immovable Property

3. Pledge

4. Marketable Securities

5. Documents of Title of Goods

6. Certificates of Fixed Deposits

7. Insurance Policies

8. Others

Frequently Used Securities in Bank


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Rating Category RatingScale

Collateral Support

HighestQuality

1 Govt. Securities,

Cash

2 Agency & High Quality MunicipalSecurities,

Insured CDs

3 Uninsured CDs,

High Quality Stocks and Bonds

4 Govt. Guaranteed Loans,

Risk Classification Scheme


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Risk Classification Scheme - ContinuingRating Category Rating

Scale

Collateral Support

Acceptable

Quality

5 Securities by Trading Asset (A/R &

Inventory)

6 Heavily dependent on collateral or

Guarantees

7 Inadequate Collateral

Rating Category Rating

Scale

Collateral Support

Poor

Quality




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How Borrowers and Lenders Behave over the Business CycleStage of Business Cycle Behavior of Borrower Behavior of Lender

Recession-unemployment

and idle capacity

- Liquidation in case of marginal

borrower

- Reduces bank borrowing

- Defers nonessential capital

- Repairs liquidity

- Excess liquidity which

erodes pricing

- Cautious on credit quality;

security conscious

Recovery and expansion - Continuous to repair balance

sheet liquidity

- Inventory and receivable build

- Increasing Productivity andearnings

- More liberal wage settlement

- Overtime payments grow

- Loan volume shows sign of

pick up in the face of excess

liquidity

- Intense competition push

bankers into unsound deals

- Rates rise and borrowers

turn to bonds rather than

bond market


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Stage of Business Cycle Behavior of Borrower Behavior of Lender

Boom-acceleration of inflationbeyond economys potential

growth

- Optimism mounts, Ordersand prices soar above

historic norms

- Raises wages sharply

- Reluctant to turn to long-

term financing increases

short and intermediate credit

substantially.

- Find cost of replacing

depreciated capital

equipment rising.

- Acquisition and tender offermore attractive.

- Find cost of replacing stocks

of raw materials and

components high

- Optimism Mounts- Increasing amounts loaned

against increasing cash flow

- High dependent on cash

flow for collection

- Demand for short term funds

increasingly strengthens.

- Lending for capital

expenditure grow and heats

up toward the end of

maturing up cycle.

- Acquisition loan increases.

How Borrowers and Lenders Behave over the Business Cycle - Continue


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Stage of Business Cycle Behavior of Borrower Behavior of Lender

Crunch-Restrictive Monetary

Policy

- Increases Prices wherever

possible. Wages increased in

anticipation of a freeze.

- Liquidity declines; leverage

sometimes excessive.

- Marginal borrowers find itdifficult to hold on.

- Cuts production as backlog

orders decrease.

- Pressures on working capital

affects debt servicing ability.

- Tries to improve collection of

receivables as payments

slow.

- Cautious selective in

extending new credit.

- Allocates funds formally or

informally.

- Discourage loan for:

Acquisition or purchase of

down share.

Speculation

Investment in outside

economy.

How Borrowers and Lenders Behave over the Business Cycle - Continue


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