Corporate Banking
Banks normally provide credit in the form of overdrafts, loans, bills discounted, or import and export finance. The process of extending any of the said forms to corporate borrowers passes through two distinctive phases; the credit decision making process (account relationship management) and the banks' internal operations.
The Account Relationship Management
Making a sound decision to extend credit to a corporate customer is a complex process. This is because corporate customers are normally engaged in a wide range of activities and are effected by a host of external and internal factors that have direct impact on their ability to meet financial obligations.
The credit decision making should, therefore, be directed by an internal lending policy that takes into account such factors and aims to protect the bank's assets, preserve its reputation and optimize the relationship profitability.
In order to allow the account relationship managers to effectively and authoritatively negotiate with their targeted corporate customers, terms acceptable to the bank, an "Account Relationship Management Acceptance Criteria" or the so called "Credit Guidelines" should be internally placed and distributed to every credit manager/officer. These guidelines set the minimum acceptance standards, in simple words, the guidelines are aimed to let the account relationship managers/officers know exactly what they should be selling, to whom, at what price and under which conditions (securities and other terms).
Based on the credit guidelines, the account relationship executive will have to submit a credit proposal evaluating the whole relationship. The Credit Evaluation process must be done systematically and within acceptable standards to maintain a high quality credit portfolio.
The preparation of the credit proposal must be guided by common sense and sensible judgment. The amount of details the proposal should contain naturally depends on several elements, namely the size and strength of the customer, the size of the bank's current and proposed exposure, the socio political environment, the economy, the industry and the bank's position in relation to other creditors.
In conclusion, the bank must place a system of credit evaluation that is based on assessment of historical, current and projected elements stated hereunder:
a. Financial Analysis; Sales, Profitability, Performance, Funds Flow, working Capital Management, liquidity, balance sheet conditions...etc.
b. Operating Analysis (Operating Risks); Owners, Management, Company, Industry, Markets.
In summary, the credit proposal (review) must highlight the Financial Risks and Operating Risks. It should state the magnitude and likelihood of such risks i.e. "What if" scenarios, and how will they be managed?
Most global banks maintain their credit evaluating standards in an internal "Instruction Manual" containing the bank's management instructions regarding each and every aspect of the credit extension or review process. It sets the management standard of credit evaluation to eliminate risks and prevent the decline in profit margins on credit facilities.
Corporate Banking Operations
The bank mostly lend against appropriate tangible securities such as deposits, shares, debentures, property, guarantees supported by tangible securities, life policies, goods, gold or other precious metal. The bank may also lend against intangible securities such as unsupported guarantees or assignment of sums due to the borrower by third parties.
It is essential that the bank follows the proper procedures in order to obtain good title when taking a security. There is a difference between possession and ownership.
The various forms of documents used for obtaining different types of security are also important. Inadequate documentation may well cause losses to the is is particularly true for the Trade Financing documentation and the Securities Agreement relating to goods.
The bank must also follow proper procedures to realise securities otherwise losses may be incurred.
The corporate operations division are normally responsible for maintaining securities documentation and updating the customers' mandates with fresh account documentation, account statements, financial statements and relationship reviews.
Handling and treatment of delinquent accounts is also an important area of operations. Grading of bad and doubtful debts for an effective recovery process is important. An effective delinquency policy is essential to avoid unnecessary financial losses.
Banks take risks in extending credit facilities to their customers, it is vital that they be able to see such risks as clearly as possible and weigh them up with care and intelligence. One popular method of measuring the banks' exposure to risk and expressing this risk in cash terms is the Cash Risk Calculation method.
Please contact us for a detailed proposal on our Corporate Banking Services.
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