II. Data analysis methodology16
As mentioned earlier, the bank's practices are to be
compared with the standards distilled from the literature as
constituting best practices in problem loans management. The
methodology used will be explained here.
For each of the variables the analysis will focus on the
similarities and dissimilarities of the bank's practices and the guidelines of
the framework.
1. Classification
The classification of a loan captures its level of risk. Either
in the Bank's classification or in
ours, the classification is made as per the financial
situation and/or overdue period of the loan. The classification on, at
January 31st, April 30th and July 31st,
is evaluated to determine whether the classification of the loan is
in compliance with its financial situation and/or overdue period
according to our criteria.
Our analysis and interpretations is based on two aspects of the
observations:
1. The similarities between the treatment of the problem loans
at the Bank and our criteria.
2. The dissimilarities between the treatment of
problem loans and the practices we recommended.
2. Provisioning
For each classification a provision is required. Then, we will
check and interpret whether the
provision made by the Bank is compliant with the interval of
provision suggested.
3. Remedial strategy
As for the two previous variables, we will compare the remedial
strategies and action plans
carried to those suggested by us.
16 For details concerning the files analyzed, please
see appendix 4.
39 MBA in Banking and Finance
III. Outcome of data collection
Our data collection and analysis showed that globally the Bank's
classification, provisioning
and remedial strategies applied on files studied is similar to
our suggestions. More explicitly,
the following results came out according to the dependent
variables (i.e. classification, provision and remedial strategy).
1. Classification
For facilities classified IA by the Bank, the corresponding
classification in our system was B
and 66% (4 out of 6) of the files were complying with this
classification. The two others were classified IA by the Bank and C by us.
For the two files classified II by the Bank, 1 was
classified C by us (the equivalent classification) and the other was
classified D.
The facilities classified III and IV according
to Bank's classification, the equivalent classification in our
system was respectively D and E. 100% of the assets were classified
similarly by both methods.
2. Provision
The provisioning system of the Bank was complying with ours for
all statistical units of the
sample except one. For this particular one, the fact is that the
facility was fully secured by cash collateral. Then, neither our system nor the
Bank's required a provisioning.
3. Remedial strategy
Only 3 of the 14 files studied were not proposed the same
remedial strategy both by Bank and
us. The other 11 files were similarly treated regarding the
remedial strategy.
More specifically, for 5 of the 6 assets classified
IA, the Bank had proposed strategy comparable with the prescriptions
of the framework, which was to closely monitor and follow-up the
credit. For all others, strategies were almost all the same
as per the classification system. The actions taken varied from
security enhancements to legal action, through facility restructuring to
legal action.
40 MBA in Banking and Finance
Despite these variable-oriented results from data
collection, other outcomes need to be highlighted:
- 4 of the 6 files in class IA were declassified before August
31 (being 66%). 50% of facilities classified II were also declassified before
the last observation date. On the other hand, 50% (2 out of 4) in financial
distress were written-off before last date of observation.
- We observed only one case of worsening of company's
financial situation judged mitigated at January 31.
- Companies in critical financial situation did not
significantly changed unlike the ones initially in poor situation, which moved
to financial distress and those so far in distress who remain in that situation
when they were not written off.
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