Bank Lending E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 369

Veröffentlichungsjahr: 2012

Beschreibung

Sophisticated banking is vital for modern society to function and prosper. Banks lend to individuals and corporations but do so after carefully exploring the risks they undertake to each customer. This book examines the important role of lending in banking operations and how banks can implement safe and effective loan initiatives. Banks rely on lending to generate profits, but it can be a risky venture. It is important for banking professionals to understand how to mitigate those risks. Bank Lending from the Hong Kong Institute of Bankers discusses a variety of topics that impact a bank's loan strategy. This is an essential read for candidates studying for the HKIB Associateship Examination and those who want to acquire expert knowledge of Hong Kong's bank lending system. Topics covered in this book include: * Assessing and reducing lending risk * Understanding the customer through financial statements * Using ratios to determine risk * Setting up an internal structure to reduce risk * Pricing and managing loans Dah Sing Bank is delighted to sponsor this resourceful book. The Dah Sing Group is a leading financial services group in Hong Kong, active in providing banking, insurance, financial, and other related services in Hong Kong, Macau, and the People's Republic of China. The Dah Sing Group has gained a reputation as one of the most progressive and innovative financial services groups. Keys to its success are the strength of the Dah Sing management team and the group's commitment to serving its customers.

Leseprobe

Contents

Preface

Part 1: Personal and Corporate Lending

Chapter 1: Lending to Personal Customers

Introduction

General Lending Principles

Types of Personal Customers

General Purposes of Personal Advances

Types of Lending to Individuals

Consumer Credit Data

Evaluating a Personal Advance Application

Summary

Key Terms

Study Guide

Further Reading

Chapter 2: Lending Considerations for Corporate Customers

Introduction

The Balance Sheet

The Profit and Loss Account

The Cash Flow Statement

Cash Budget and Cash Flow Forecast

Reliability of Accounting Information by Source

Summary

Key Terms

Study Guide

Further Reading

Appendix 2.1: Comparing FIFO, LIFO, and AVR Inventory Methods

Chapter 3: Financial Ratios and Operating Risks

Introduction

Techniques of Financial Analysis

Understanding Ratio Analysis

DuPont Analysis

Limitations of Financial Ratios

Operating Risks of the Borrower

Analysis Tools and Approaches

Summary

Key Terms

Study Guide

Further Reading

Part 2: Corporate Credit

Chapter 4: Credit Assessment

Introduction

Lending Principles

Credit Decision Tree

Credit Risk Rating

Summary

Key Terms

Study Guide

Further Reading

Chapter 5: Structuring a Loan Facility

Introduction

Security in Bank Lending

Conditions and Covenants

Pricing a Loan Facility

Summary

Key Terms

Study Guide

Further Reading

Appendix 5.1: Sample Loan Agreement (For Illustrative Purposes Only)2

Appendix 5.2: SME Funding Schemes

Chapter 6: Meeting Business Needs

Introduction

Business Sectors in Hong Kong

Types of Credit

Trade Finance

Working Capital Management

Summary

Key Terms

Study Guide

Further Reading

Chapter 7: Credit Control and Problem Loans

Introduction

Credit Management Process and Structure

Characteristics of a Sound Credit Monitoring System

Credit Risk Mitigation

Corporate Failure

Remedial Actions

Summary

Key Terms

Study Guide

Further Reading

Index

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Preface

Sophisticated and effective banking activities are vital for modern societies to prosper. These banking activities include, in a nutshell, deposits and lending. The latter, in particular, contributes significantly to the well-being of every banking institution and is instrumental to commercial and social development across the globe. As such, it is of vital importance that a bank, regardless of its scope and scale or geographic footprint, employ effective techniques and knowledgeable personnel to keep its risk exposure within established parameters and maintain, if not improve, its credit rating, credibility, and reputation. Banking professionals in turn must continuously develop and refresh their understanding of lending practices and procedures for the benefit of their employers, the banking system, and the economy.

Banks lend to individuals and corporations to generate profits through interest and fees. To do so, banks consider the risks inherent in the process of lending and use complex analytical tools to assess and mitigate them. The business of lending is intrinsically linked to the management of risk. Effective risk management is necessary for effective and profitable bank lending. This book looks at the process of lending, its risks, and how to assess them and tackle them. A second book in this series, Credit Risk Management, expands on the importance and the systems to manage risk effectively.

This book is primarily aimed at professionals with a solid grounding in the banking industry, but the layperson would also find considerable value in the discussion of bank processes and goals. Like the other books in this series, this work focuses on practices in Hong Kong, but does so with an international perspective. Ultimately, readers should find this work helpful in developing critical evaluation skills to perform the complex tasks of planning, design and supervisory or management functions necessary in a broad range of banking activities.

The first chapter in this book discusses the process of lending to personal customers, the types of loans that banks typically make available to them, and how banks can reduce risk. In the second chapter, the discussion shifts from personal customers to corporates, going through the important challenges of assessing and mitigating credit risks. Knowing the concepts of credit assessment and mitigation is only the first step towards understanding the practicalities behind these theoretical concepts. Chapter 3 starts down that route by discussing how to dig deep into financial statements and use ratios to fully understand the performance and risk associated with borrowers. The next chapter considers internal structures and how they can help banks lower lending risk. The last three chapters move on to the more practical realities of loan pricing, customer business needs, and the all-important processes of credit management.

This book includes detailed explanations, summaries, tables, and charts to help industry professionals develop a sound theoretical framework for their work in the field. Both students and working professionals can benefit from this detailed work produced in collaboration with some of Hong Kong’s most prominent professionals. All efforts have been undertaken to ensure the information in this book is thoroughly up to date but it is worth noting that any changes to laws and regulations after June 30, 2011 are not included.

Aimed at banking practitioners and designed as an essential tool to achieve learning outcomes, this book includes recommendations for additional readings. A list of further readings at the end of each chapter will help readers expand their knowledge of each subject. Essential readings will occasionally be highlighted and these are important for students preparing for the Associates Examination of the Hong Kong Institute of Bankers (AHKIB) while students should also be familiar with supplementary readings that provide information that is necessary but not always spelled out in this book.

The preparation of this book and others in the series required generous input from various individuals from their respective expert areas. Those from Hong Kong’s academia offered practical insights into the context for the ideas, concepts, and theories presented and discussed in this book. Subject experts and market practitioners helped ensure all information contained here is relevant and applicable to everyday practice. Stakeholders from the commercial sector and the banking industry in turn confirmed that the information provided here sufficiently reflects the reality of the banking sector, bridging the gap between theory and practice for banking professionals.

The preparation of this book would not have been possible without the help, advice, support and encouragement of dozens of people. In particular it is important to mention Eugene Iu, Simon Y C Lo, Wilson Lau, Kevin C.K. Lam and Candy Wan (Lui Mi Ping). We owe thanks to all of them.

The Hong Kong Institute of Bankers

PART 1

PERSONAL AND CORPORATE LENDING

CHAPTER 1

Lending to Personal Customers

Learning objectives

After studying this chapter, you should be able to:

1 Discuss general lending principles in advances to personal customers

2 Explain the types and purposes of lending to individuals

3 Describe the characteristics of residential mortgage loans and how interest rates and other fees are computed

4 Explain the various home ownership schemes in Hong Kong and the role of the HKMA and HKMC in Hong Kong’s mortgage loan market

5 Understand the process of evaluating personal credit applications

Introduction

Lending money is the business of banks. Banks lend to individuals and corporations on the condition that it will be returned after an agreed period, usually with interest and fees. But lending is inherently risky. Repayment of a loan and interest on it depends on the future cash flow of the borrowers, and that future cash flow can never be certain. To be successful, banks need to ensure that the risks they take are reasonable and controlled within defined limits.

In this chapter,1 we discuss the process of lending to personal customers, the types of loans that banks typically make available to them, and how banks can reduce the risk that these advances to individuals will not be repaid. Let us first learn about the general lending principles in making loans to personal customers. To make these principles more memorable to practitioners, they are usually arranged into easy to remember mnemonic devices such as CAMPARI, 5Cs, PARTLAMPS and PARSER.

General Lending Principles

You may know Campari as an alcoholic drink obtained from the infusion of bitter herbs, aromatic plants, and fruit made by Italy’s Campari Group. In banking, though, CAMPARI stands for the initial letters of the factors that banks consider when making a decision as to whether or not to extend a loan to a personal customer: Character, Ability, Margin, Purpose, Amount, Repayment, and Insurance.

Character. Before extending credit, the bank must be certain of the borrower’s character. How reliable is the borrower’s word regarding the details of the application and the promises made to repay? Is the borrower making overly optimistic claims?Ability. An individual borrower’s ability to repay can partly be gleaned from the manner with which he or she handles financial affairs. Is there adequate cash flow in present earnings? The bank should examine the borrower’s proof of income against his or her bank account records (such as bank statements), credit card statements, and references from banks and credit agencies. It should watch out for red flags such as personal cheques being dishonoured for lack of funds, frequent requests of stop payment on issued cheques, excesses on agreed facilities, and loans not being repaid on schedule.