CHAPTER FIVE: RECOMMENDATIONS AND CONCLUSION
Using a sample of problem loans files, we assessed the problem
loans management practices
of the Bank and compared them to what we set up as
best practices in problem loans management. The overall outcome showed that
in 78% of the cases studied, the practices of
the Bank were complying with ours.
At first sight, this percentage is good. Although, we
provided arguments to justify the discrepancies we also noted some
weaknesses that if well managed can improve the existing problem loans
management practices.
The present chapter is divided in four parts:
- Pre-lending: refers to measures that should be
taken before granting a loan. They are related not only to the credit
activity but also to the overall bank policies and incentives.
- Credit monitoring is about the effective follow up of
the credit on the continuous basis from disbursement to full repayment of
principal and interest.
- Workout strategies: will provide strategies to manage
and recover problem loans.
- Conclusion will end the study.
I. Pre-lending recommendations
1. Industry risks
Caution should be taken to avoid two kinds of risk related to the
industry:
1) Avoid great exposure to a specific industry and have at
any time, a clear idea of its exposure to different industries so that if
the industry collapses it can manage the trickle down effects.
2) Make sure the borrower is not going to invest the money in
an industry in distress.
2. Collateral risks
The way a contract is made may weaken the Bank when the
transaction with the borrower
turns bad. In some files examined notice was made that the Bank
was hardly trying to add personal properties of the owner of the company to
collateral so that it could get its money
43 MBA in Banking and Finance
back. To prevent the Bank from such situations the loan
agreement contracts must include strong clauses like:
- The increase of collateral in cases of weaknesses of the
financial situation of the borrower
- The market value of collateral must fully cover the
amount of the debt especially with companies with small number of
shareholders.
3. Information system
The Bank must have an information system that works properly and
efficiently to provide
any information such as:
- Collateral pledged by a borrower is also pledged in one or
many other transactions with other banks. This can lead to litigious
situations.
- In case of cross default i.e. if the borrower fails to meet
his obligations with another bank. This should normally involve the
classification of the borrower at least on a watch list.
4. Size and ownership of the
companies
All 4 companies classified IV by the Bank had small numbers of
shareholders. In addition, the
debts of 2 of them have been written of and the
others were taken to court. Such small companies must be treated with
carefulness because as noted they have a higher risk profile. Lending to such
companies must not be done before the Bank has the assurance that
the companies' clients are solvent. Facilities to those companies must
mostly be granted to finance specific transactions and the proceeds must be
domiciliated in the Bank's books.
5. Portfolio growth incentives
Generally, credit officers are awarded incentives based on the
assets booked. They may not be
careful enough to the transactions they recommend to the Bank.
If relationship officers and other credit officers are awarded based on
a «Quality-portfolio-oriented incentives» it will make the Bank
have a safety growth of its credit portfolio.
44 MBA in Banking and Finance
6. Companies dealing with
Governments
Governments often fail to meet their obligations timely. When
lending to companies dealing
with Governments the Bank must assume that the likelihood of
untimely repayment is high, especially when the repayment of the facility is
supposed to be done upon settlement of the transaction with the Government.
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