Risk-BasedRisk-BasedSMESME LendingLending

Day TwoDay Two

Session 6Session 6

• First Quiz

• Recap of what we learned yesterday.

• What we shall do today?

• Question-and-answer

For TodayFor Today• Financial indicators and other ratios

• Third case

• Loan covenants and loan monitoring

• Organizational structure

• Calculating LGD

• Quiz No. 2

• Fourth case

Session 7Session 7

• Financial indicators and some illustrations

• How do we calculate these ratios and other financial indicators?

Session 8Session 8• Rating another actual SME Case

• Refer to 2nd case in page 55

• Explain or introduce briefly the case

• Work in small groups within time limit

Session 9Session 9• Report back

• What is the BRR rating? Will you lend to this company?

• What is the FRR rating?

• What risks did you identify?

• What loan covenants should you require or impose?

• Question–and-answer

Session 10Session 10• What are loan covenants?

• Why do we need to impose or require loan covenants?

• To control, mitigate, reduce and manage business risks

• Standard covenants in the Loan Contract plus some special covenants.

Loan covenantsLoan covenants• Two kinds of covenants: (1) affirmative

[or do] covenants and (2) negative [or don’t do] covenants.

• Examples of both types of covenants

• Common loan covenants, see SF page 26

Early warning systemEarly warning system• Banks should set an Early Warning

System through systematic and close monitoring of borrowers.

• Banks should identify various warning signals and take appropriate actions on timely manner

• This EWS could help prevent serious problems

Early warning systemEarly warning system• See Handbook page 86 for various

warning signals.

• Discuss these signals

Loan monitoringLoan monitoring• Loan officers should monitor the

accounts based on the BRR and FRR rating

• Risky accounts should require closer and more frequent monitoring

• The BRR rating should be repeated every 6 or 18 months

Loan monitoringLoan monitoring• A sample monitoring guide BRR 1 to 4: annually. BRR 5 to 6: every six months. BRR 7: every three months. BRR 8 to 10: ongoing (report once at least

a month)

• Another sample found in page 89

Collateral monitoringCollateral monitoring• What is collateral monitoring?

• How frequently should it be done?

• Who should do it?

• Why is it needed?

Loan pricingLoan pricing• Banks may implement a risk-based

pricing of its loans.

• The BRR rating of a borrower will determine how much interest should be charged.

• The higher is the risk, the higher is the price and vice-versa. Why?

• See suggested formula on page 115

FRRFRR• The FRR rating scale

• You can develop your own scale. It is very easy to create your own.

• FRR is very useful especially if the bank is strongly collateral-focused

Calculating LGDCalculating LGD• LGD considers the financial

implications to the bank in case the borrower actually defaults on his loan.

• It measures the potential losses

• The LGD can be calculated using a mathematical formula;

• See SF page 114

• Why is this LGD important?

Organizational structureOrganizational structure• The organizational structure will have

to be altered or modified in a bank to accommodate the new credit assessment functions

• Why is this so?

• Some examples of banks and financial institutions with various structures

Quiz No. 2Quiz No. 2• Let us stop for a while and see how

much new knowledge we have absorbed in our minds.

• Quiz No. 2

Session 11Session 11• Let us practice our rating skills by

doing another rating exercise

• Refer to 4th case in page 101

• Briefly introduce the case

• Work in small groups within time limit

Session 11Session 11• Report back

• What is the BRR rating? Will you lend to this company?

• What is the FRR rating?

• What risks did you identify?

• What loan covenants should you require or impose?

• Question–and-answer

HomeworkHomework• Reflect on what we learn today and write

in a piece of paper 1 or 2 questions to clarify things that are unclear.

• Think tonight – will your bank adopt BRR and how you will do it

• Does your bank need more money? Prepare your questions about SBC and its financing programs