What is funded credit?

:-Any kind of C facility which involves direct outflow of bank's fund on account of granting C to borrower refers to FC facility.Providing C is one of the core functions of commercial bank.Banks provide credit in different forms.All sorts of C can described into FC forms.FC facilities may be classified into two forms say,loan&advance.FC can be described in 2 words:-loan&advance r generally used interchangeably. What r the major classifications of funded credit -explain?:-(a)Loan:-When a credit is made in a lump sum & repayable either in fixed monthly/quarterly/half yearly/annual installment or in lump sum & no subsequent debit is ordinarily allowed except interest ,incidental charges etc .is called a loan. Loans can be classified in two types:-1.Demand loans r repayable on demand by the bank&no fixed installments r laid down.It belongs to short tern loans. 2.The term loans r granted for a specific period(say for a period 2 to 5 years or over)& repayment is made in installments.(b)Bills Discounted &Purchased:-The banks also grant credit to their customers by discounting or purchasing their bills of exchange/BE.Such BE arise out of commercial transactions both in inland trade &foreign trade.Bills r classified into(i)Clean Bills:-When the drawer of a bill encloses with the bill the documents of title of goods,such as,Bill of Lading,Railway Receipt,Steamer Receipt.In the absence of such documents it is termed as a clean bill. (ii)Documentary Bills:-To be delivered to the drawee of the bill o n payment or against acceptance of bill,as the case may be,the bill is called a documentary bill. By nature of payments, bills can also be classified into 2 categories:-(i)Demand bills:-Where a bill is payable "at sight" or "on demand"or"on presentation" it is called a Demand bill.(ii)Usance bills:-If a bill matures for payment after a certain period of time ,say 15,30 or 60 days after the date,it is called a usance bill.(c)Advance:-1.Overdrafts:The O/D is a kind of advance.O/D simply means over-drafting in a particular account i.e.current account .In some cases, O/D is permitted in S.B account also particularly for salaried class persons.It is a temporary accommodation of funds .Usual O/D facilities are:-a.Clean Overdraft:When O/D is unsecured,it is called clean overdraft.It is permitted to salaried persons or traders with satisfactory account record. b.O/D against Security:O/D can also be sanctioned with an arrangement with the borrower against some securities like FDR,LIC policy,gold ornaments,etc. c.Temporary Overdraft:When C/A O/D is allowed for small amount to honor an important cheque without any prior arrangement by the bank to a first class party for a short period is called temporary overdraft.2.Cash Credit:A cash credit is an arrangement by which a banker allows his customer to borrow money up to a certain limit.Sometimes CC is allowed against hypothecation of goods.In this case ownership&possession of the goods remain with the borrower although by virtue of the hypothecation agreement ,the bank can take possession of the goods if the borrower defaults. What r the differences between loan & advances? :-{(1)Advances:-A is an amount of money that is loaned from future earnings .For example,if i get a 500 advance on my salary,my next paycheck will be decreased by 500 to repay the money you borrowed from that paycheck .Types:-1.Overdrafts2.Cash credit.Advantages of an Advance:-Most companies that offer advances to their employees do not charge interest ,so it can be a safe&cheaper alternative to a payday loan or short -term bank loan.} {(1)Loan:-A loan is an amount borrowed from a bank or other institution that L money.Borrowers sign a promissory note that states the terms of the L&the length of time for repayment .L usually require an amount of interest to be paid back with the L.Types:-1.Demand loans&2.The term loans.Advantages of Loans:-A loan can be borrowed&paid back in increments over a period of time.Because it can be paid back in smaller amounts,paying back the loan is less than a hardship that losing a large amount from one paycheck.} Advance v Loan:-Advances r generally interest free ,but must be paid back,usually from the next paycheck.Loans will have origination fees&interest,but can be repaid over a longer length of time. Write down the characteristics of loan? :-1.Time to maturity:-TM describes the length of the L contract.L r classified according to their maturity into :- 1.short-term debt.2.intermediate-term debt.3.long-term debt.2.Repayment Schedule:-Payments may be required at the end of the contract or at set intervals,usually on a monthly or semi-annual basis.3.Interest:-Interest is the cost of borrowing money.A credit contract may adjust rates daily,annually,or at intervals of 3,5&10 years. Floating rates r tied to some market index&are adjusted regularly. 4.Security:-Assets pledged as security against L loss r known as collateral.Credit backed by collateral is secured . Write down the characteristics of advances? :-1.A can be arranged from banks in keeping with the flexibility in business operations.Traders,may borrow money for day to day financial needs availing of the facility of cash credit ,bank overdraft .The amount raised as loan may be repaid within a short period to suit the convenience of the borrower.2.A r utilized for making payment of current liabilities, wage&salaries of employees, &also the tax liability of business. 3.A from banks r found to be economical for traders &businessmen,because banks charge a reasonable rate of interest on s uch advances.4.Banks generally do not interfere with the use ,management&control of the borrowed money.But it takes care to ensure that the money lent is used only for business purposes. 5.A r found to be convenient as far as its repayment is concerned. 6.A by banks generally carry element of secrecy with it.Banks r duty-bound to maintain secrecy of their transactions with the customers.This enhances peoples faith in the banking system. Differentiate between demand loan & term loan?:-Demand loans r repayable on D by the bank&no fixed installments r laid down.It belongs to short tern loans. A DL is a loan which is repayable on demand by the bank.In other words,it is repayable at short -notice.The entire amount of DL is disbursed at one time&the borrower has to pay interest on it.The borrower can repay the L either in lumpsum(one time)or as agreed with the bank.For example,if it is so agreed the amount of L may be repaid in suitable instalments.Such loans r normally granted by banks against security .The security may include materials or goods in stock,shares of companies or any other asset .DL r raised normally for working capital purposes ,like purchase of raw materials,making payment of short-term liabilities.The term loans r granted for a specific period (say for a period 2 to 5 years or over)& repayment is made in installments.The TL can also be repayable on demand if default occurs in repayment or some eventualities,as listed in the agreement,take place.Generally,medium&long term loans r called TL.TL r granted for more than a year&repayment of such loans is spread over a longer period.The repayment is generally made in suitable instalments of a fixed amount .TL is required for the purpose of starting a new business activity ,renovation,modernization,expansion/ extension of existing units,purchase of plant and machinery,purchase of land for setting up of a factory , construction of factory building or purchase of other immovable assets .These L r generally secured against the mortgage of land ,plant&machinery,building&the like. Write short notes on the PAD & LIM?:-Payments against documents(PAD):the bank which opens the LC is bound to honor its commitment to pay for import bills when these r presented for payment,if drawn strictly in terms of LC.The foreign correspondent bank,which negotiates the documents,debits the account of the opening bank &,in fact,the amount thus stands loan on behalf of the importer.The opening bank will lodge the shipping documents to their book & will respond to the debit advice oriented by the foreign correspondent to the debit of " PAD" account or "Bills of Exchange(B/E)" accounts&present the bill to the importer for payment. Loan against Imported merchandise (LIM):Usually,importer fails to retire the documents in spite of repeated reminders from the banker or the bank has to clear the goods imported under the letter of credit at the request of the importer (borrower).In both the cases ,whether the importer fails to retire the documents or request for clearance of goods ,the outstanding under PAD or B/E is transferred to "Loan against imported Merchandise(LIM)" account the overdue interest from the date of accompanying Bills of Exchange or negotiating date to the date of transfer to LIM account is charged .At the time of opening of letter of credit the banks obtain from the importer an agreement on stamped paper which provides for financing and,if necessary,clearance &storage of goods by debiting importer's account at their risk&responsibilities.After clearance ,consignments r taken delivery by the importer on full payment of bank's liability.Normally part delivery is not allowed while on LIM account.

What r the major forms of export financing,define with example & characteristics? :-The major forms of export financing are :-1.Packing Credit:PC is a short term credit granted by a bank to an exporter for assisting him to buy,process,pack&ship the goods.The credit is gradually extended for freight,handling charges,insurance & export duties.A packing credit advances does not normally extend beyond 180 days&has to be liquidated by negotiation/purchase of the Bills Of Exchange.2.Export trust receipt: under this arrangement ,credit is allowed against TR&the exportable goods remain in the custody of the exporter but he is required to execute a stamped ETR in favor of the bank,wherein a declaration is made that goods purchased with financial assistance of bank r held him in trust for the bank.3.Loan under Red clause Letter of credit:Under an ordinary LC the exporter receives payment for the go ods exported by him only after goods r shipped.(a)an immediate payment to the beneficiary(exporter)of the full or part amount of the credit .(b)payment to the beneficiary of part amount from tome to time indicate in the credit against delivery of specified documents.Since the clauses giving authority is usually printed in red ,such a LC is known as RCLC.For example,the exporter may be required to give an undertaking to the effect that the amount received will be utilized for purchasing raw materials needed fo r manufacturing or processing only the goods to be exported.4.Payment against Document Sent for Collection: when banks handle export bills on collection basis,they simply act as agent of their customers .The bills r accepted for collection when(a)the exporter is unable to negotiate it because of the absen ce of a letter of credit.(b)the exporter does not enjoy high reputation which is needed to sell the bills to the banker .In case of bill for collection,the proceeds r paid to the customer on actual realization of the bills. What r the different kinds of L/C - explain?:-1.Irrevocable&revocable letters of credit: -A RLC can be changed or cancelled by the bank that issued it at any time&for any reason.ILC provide more security than revocable ones.2.Confirmed& unconfirmed letters of credit: -When a buyer arranges a letter of credit they usually do so with their own bank,known as the issuing bank.The seller will usually want a bank in their country to check that the letter of credit is valid.For extra security ,the seller may require the letter of credit to be 'confirmed' by the bank that checks it .By confirming the letter of credit,the second bank agrees to guarantee payment even if the issuing bank fails to make it.So a confirmed letter of credit provides more sec urity than an unconfirmed one.3.Transferable letters of credit: -A TLC can be passed from one 'beneficiary'(person receiving payment)to others. They're commonly used when intermediaries r involved in a transaction.4.Standby letters of credit :A SLC is an assurance from a bank that a buyer is able to pay a seller .The seller doesn't expect to have to draw on the letter of credit to get paid.5.Revolving letters of credit :-A single RLC can cover several transactions between the same buyer &seller.6.Back-to-back letters of credit :-BTBLC may be used when an intermediary is involved but a transferable letter of credit is unsuitable. What is overdraft?:-The OD is a kind of advance.OD simply means over-drafting in a particular account i.e.current account .In some cases,OD is permitted in S.B account also particularly for salaried class persons.The customer may be sanctioned a certain limit upon which,he can overdraw from his current account within a stipulated period .Basically it is an agreement between a banker & its customer in which the later is allowed to withdraw over &above his credit balance in current account . Here,withdrawals or deposits can be made any numbers of times at the ,convenience of the borrower , provided the total amount overdrawn does not ,at any time,exceed the agreed limit.Interest is calculated &charged only on the actual debit balances on daily product basis .It is a temporary accommodation of funds. What r the different types of overdrafts r available?:-a.Clean Overdraft:OD may be secured or unsecured.When it is unsecured,it is called COD.COD means a temporary accommodation to meet purpose of sudden requirements for which no security is required except the personal security of the borrower.It is permitted to salaried persons or traders with satisfactory account record. b.Overdraft against Security:OD can also be sanctioned with an arrangement with the borrower against some securities like FDR,LIC policy,gold ornaments,etc.c.Temporary Overdraft: Sometimes in a current account O/D is allowed for small amount to honor an important cheque without any prior arrangement thereof.Such facility by the bank to a first class party for a short period is called TOD. What is cash credit & its Kinds?:-A CC is an arrangement by which a banker allows his customer to borrow money up to a certain limit. CC arrangements r usually made against the security of commodities hypothecated or pledged with the bank. a.CC pledge:this type of facility is always provided against pledge of goods or stock in trade which remains in the go down under the possession of the bank with effective control but ownership remains with the borrower. b. CC is sometimes allowed against hypothecation of goods.In this case ownership&possession of the goods remain with the borrower although by virtue of the hypothecation agreement ,the bank can take possession of the goods if the borrower defaults. Characteristics of:Characteristics of L/C:-1.Negotiability:-L/C is negotiable.Before starting trade one can open L/C & this is bargainable by parties.2.Revocability:-LC may be either revocable or irrevocable.3.Transfer & Assignment:-The seller has the right to transfer or assign the right to draw ,under a LC only when the letter of credit states that it is transferable or assignable. 4.Sight&Time Drafts:-All LC require the seller to present a draft &specified documents in order to receive payment.5.Standby LC (Domestic):The Standby or domestic LC serve a different function than the documentary LC.The standby LC serves as a guaranty by the issuing bank rather then a source for payment . Characteristics of Back to back L/C:-1.Back to the opening LC applicant&not the original intent of the issuing bank.2.Back to back with the original credit card is two separate LC,co-exist.3.The second back to back LC beneficiary cant get the original card issuing bank's payment guarantee ,the issuing bank can only get the payment back to back guarantee .4.His back to the bank to open LC that the card issuing bank,upon opening,the bank must bear the responsibility of the issuing ba nk.5.Transferable LC&the difference between back to back LC is transferable LC:-the credit of Note "Transferable" ,the beneficiary is entitled to credit transfer all or part of one or more third parties (the second beneficiaries)use. Characteristics of Bid bond:-1.One kind of bank guarantee or undertaking issued by a bank on behalf of its clients(mostly contractor )to enable him to submit his bid in a tender.2.For issuing bid bond bank usually obtains cash margin &counter guarantee from the customer .3.A Bid Bond is issued by the Surety to the owner of the project in lieu of a required cash deposit .4.The cash deposit(usually 10% of the bid amount)is subject to full or partial forfeiture if the contractor is the low bidder &fails to either execute the contract or provide the required Performance and/or Payment Bonds. Characteristics of Performance bond:-1.A performance guarantee is given after the tender or bid of a particular client of the bank has been accepted .2.It is a guarantee where the bank gives an undertaking to the third party that its clients shall complete the job as per terms of the tender or to pay damage up to the guarantee money.3.Banks while issuing such guarantee takes certain cash margin&counter guarantee from its clients to secure its pos ition. Characteristics of Warrantee :-(Nancy A.Lutz & Philip H.Dybvig,1989)Characteristics of warranty is based on Durability,Maintenance,Two Sided Moral Hazard in a Continuous,Time Model etc.Just like Guarantee. Characteristics of Guarantee: -(a)Three Parties:-There r three parties in a G(1)Principal creditor(2)Principal debtor&(3)Guarantor.(b)Primary Liability of Principal Debtor: -The primary liability to pay the debt falls on the original debtor.The guarantor will pay only when the principal debtor fails to pay whole or part of the agreed debt. (c)Guarantor has no interest in the Contract Entered.The guarantor is answerable for the loan if the debtor defaults He has no interest in t he contract between the principal creditor &the principal debtor.Capacity to Contract:-The persons or firms who r able to make contracts may stand as surety for loans.

CHAPTER 3 For investing own funds one has to ensure 3 things .What r those things?:-(1)Safety of his own money;(2)Recovery of his own money;(3)Actual help to others in times of need(Srinivasa 1986,1). Define credit & credit management? :- Encyclopedia of banking&finance describes the origin&defines credit as-Credit derived front Latin word "credo" means "I believe", &usually define as the ability to buy with a premise to pay,or the ability to obtain title In,&receive goods for enjoyment in the present although payment is deferred In a future role. Credit management is the process of accomplishing various tasks relating to deciding grant to not granting credit to others,determination of terms&conditions,proper documentation,frequent monitoring&reviewing the performance of borrowers &taking necessary steps to ensure smooth recovery of credit which ensure profit maximization to the bank. What r the main deficiencies of credit management of banks in developing countries? :-(I)The absence of written policies(2)The absence of portfolio concentration limits excessive centralization or decentralization of lending authority(3)Poor industry analysis(4)A cursory financial analysis of borrowers(5)An excessive reliance oil collateral(6)Infrequent customer contact(7)The Inadequate checks&balances in the credit process(8)Absence of loan supervision(9)A failure to improve collateral position as credit deteriorate(10)Poor control on loan documentation(11)Excessive O/D lending (12)Incomplete credit files(13)The absence of asset classification &loan loss provisioning standards(14)A failure to control &audit - the credit process effectively (Diana&Clayton 1997,32). Explain changing status & qualifications of credit management? Explain the evolution of credit management? :-The major factor contributing to the changing status&qualifications for credit management has been th e rapid&tremendous growth of industry & commerce.When business was mostly under the control of it sole proprietor &relatively small in size,the approval of credit was simple &personal matter 50 to 70 years ago ,it was customary that lenders were to visit markets once or twice in a year.At that time borrowers were personally known to lenders,the size of business was small&for a number of year's bookkeepers were in control of the credit management task.With the pace of development of commerce ,the personal relationship was lost&some other basis was needed to manage commercial credit.With the organization of the National Association of Credit Management in U.S.A.in 1896&several other developments supported the significance of professional credit management.Now credit management has moved up to the status of an established business group ,with prerogatives,responsibilities,standards,&ethics.Formerly,a credit officers' attitude was dependent largely on the safety of lenders fund .Now this attitude has changed&it includes the attitude of how can I help my customers?Many beneficial results have come from this creative helpful attitude &it was entertained by a number of business&educational people .Modern business techniques&the operation or an effective credit department demand that credit manager will be intimately knowledgeable about the relationships of credit to business finance,production,marketing,&other aspects of the business.This interested efficiency has enabled him to view the problem in another light.Kreps et al Divide this changing attitude of a credit manager in three ways,namely:-1.The protective attitude: -it is primarily concerned for the banks protection.2.The constructive attitude: -it is concerned about intelligent&exacting analysis by which a salient trend is brought out&future events r prophesied with greater accuracy .3.The creative attitude: -It includes informing the customer of' these trends &helping him to avoid unfavorable contingencies(Kreps et al.1973,222). Krepts divide changing attitude of a credit manager in 3 ways.What r those explain?:-Kreps et al Divide this changing attitude of a credit manager in three ways,namely:-1.The protective attitude: -it is primarily concerned for the banks protection .2.The constructive attitude: -it is concerned about intelligent &exacting analysis by which a salient trend is brought out &future events r prophesied with greater accuracy .3.The creative attitude: -It includes informing the customer of' these trends&helping him to avoid unfavorable contingencies(Kreps et al.1973,222). Who is credit officer? :-Rwegasira(1992)defined a lending credit officer as,The credit officer will be defined to be any individual working on behalf of a bank&empowered to decide whether or not to lend to bank customers at some determined interest rate"(Rwely-asira 1992,2).In his word,a lending credit officer is economically rational &expected to be utility maximizer.For attaining the objective of utility maximization,' credit officer would try to trade-off between risks&returns.In this case,the relevant returns or income is in the form of interest payments to the bank,&the risk is in terms of interest payment to the bank,&the risk is in terms of default of a business firm or a company. Explain the landing credit officers decision making process with a relation to production & accounting process? :-Credit officers' decision-Ina king activity can be compared with production&accounting process.Each of these systems is characterized by specific inputs ,a process&output.The following figure exhibits the production,accounting&following figure accounting lending credit officer's decision making process.{(CHART) } { ( A firms input & out process> Materials,manpower ,employment,energy etc>Productive transformation process>Goods&services> Market)( Accounting unit of a firm>Data skills GAAP>Data processing>Financial statement reports> Users)( A credit officer>Financial information,non financial information,skills,goals,perceptions of analysis>Decision process>Lending decisions e.g.whether or not to gr ant loan)} The actual inputs of a productive unit include material,manpower, equipments,energy&other monetary&non -monetary economic resources from the environment.The process of the firm consists of the productive transformation of inputs into goods&servic es i.e.creation of Form/service utility.To perform this analysis,the credit officer has to acquire various type of information regarding the prospective borrowers' Integrity,history,intention&perhaps most important of all his financial ability to service t he debt(Rwegasira 1992,7). What is the conceptual framework of credit management & explain its various aspects? :-Credit management involves various tasks.For clear understanding the credit management,it is needed to know the meaning of various concepts involve in CM.The credit management needed to know the meaning of various concepts involve in credit manage ment.The followin g subsection describe the various aspects of CM :-1st:-One must determine priority sectors he/she is interested to lend all(] prohibited sectors he/she.is not interested to lend (Credit policy formulation)2nd: -One must determine which borrowers r likely to pay their debt (Credit investigation&analysis)3rd: -One must decide how much credit he/she is prepared to extend in each borrower (credit approval)4th:-He/she must decide what evidence he/she need of indebtedness (Documentation)5th:-After he/she has granted credit,he/she has the problem of collecting the money when it becomes due.Flow does he/she keep track of payments? (Monitoring,review,&loa n recovery) What r the steps in credit management? Enumerate a flow chart of credit management?:-Strategic plan for target market,credit policy formulation,(initiation,client request,relationship,marketing),client interview,credit investigation,(C analysis,purpose,business,management figures,C rating),C analysis report,C approval,(C structuring,pricing,repayment),{C negotiation,(tenor,pricing,repayment,covenants,security&others)}, documentation,C disbursement,internal audit,C monitorng&review,handling problem C,recovery of C. Explain strategic plan for target markets? How does it play role when its developed?:-Every bank should develop a strategy by targeting markets where they r interested to invest in current year&in future.For formulating this st rategy,every bank must have adequate data about the economy&the prospect of the sectors.By analyzing these data,bank management call be able to determine which sectors would be profitable for them&how they would invest in these particular sectors. Define credit policy & what r the components?:-The primary task of the hank is to collect deposit&to lend it.To ensure efficiency in this process a bank must decide what types of' loans they will or will not make,in which sector tile),will invest in&where not,what types of loan they will male&what not,to whom it will lend&to whom not&what r the conditions,one has to fulfill to receive

loans.Bank's credit policy usually reflects the above directions.Credit policy reflects the wisdom of banks&their intention about what they r actually wanted to do&what not. Gupta(1991)recommended thirteen aspects for a good lending policy.The aspects arc: -(1)Corporate mission statement(2)Analysis of the present credit portfolio(3)Broad objectives of the policy(4)Preferred area of lending (5)Discouraged areas of lending(6)Strategies to achieve the above objectives(7)Exposure limits (8)Liquid gap analysis(9)Spread management(10)Credit expansion policy(11)Combating the growing menace of MIA's.(12)Industry wise specialization( 13)Pricing strategy.  Define credit initiation/client request/relationship marketing? Traditionally,borrowers apply to the bank for loan.Most banks in Bangladesh follo w th is trad it ion .Th is tr ad it ion ha s ch an ge d.No w in the mo st d e velop ed countries, commercial banks have introduced the relationship marketing which means credit officers r approaching borrowers for marketing their credit. Most of the banks in developing countries&also banks in Bangladesh r now thinking to introduce relationship marketing. What is loan interviewing? What r its primary goals? What r the secondary goals according to pace etal (1977)?:-(Commercial credit is viewed as a screening process in which the first stage is the loan interview.Clemens states that-It is an education to watch&study a man of real stature as lie deals with a top -level customer.)(The goal of loan interview primarily is to collect information to judge the cred it worthin ess o f b orrower s .But this is not the only goal o f loan inter vie w .)(Pace ct al.(1977)identified multiple goals of loan interview such as:-1.There is a unique opportunity to convince customer that he has chosen the best bank in town which ultimately enhances the goodwill of the bank. 2.It facilitates the collection of necessary information to reach a loan decision.3.It gave an opportunity to build new bank business.4.C r ed it int er vie w e nabl es cred it o ffic e r to obta in enou gh d ata t a & understanding to ensure that the loan can be collected.After interviewing the borrower,the loan officer will be in a pos ition to make decision whether he will continue with the lending process or not .) Define credit investigation? :-Cr ed it investigation is the process of acquiring enough information from different sources determine the loan applicant's willingness&capacity t o service the proposed loan.Upon completion of credit investigation,the loan officer should have a suffic ient idea of,the client's reputation,character&experience. If banks have both departments,credit department has done most credit investigation activities.Meaningful investigation one has to follow some steps.{Kreps et al(1973,124 -125)} identified the following steps of credit investigation:-1st step:-To decide what questions justify-the work of obtaining answers.2nd step:-The credit officer should determine,who is best suited obtaining to handle credit investigation.3rd step:-What r the probable sources of information? What r the qualifications of a credit investigator ? What r the suggested principal factors of credit investigation by Heinemeyer (1980)?:-{ There is no basic boundary of qualification for an investigator.It is customary that an investigator should have knowledge in several basic fields.Since financial statement information is a key in lending decision, the educational background of in investigator should include knowledge of accounting.Wife] )the investigator looks at information from financial statements.he or she should be able to focus on what the questionable of- missing items are&how these should be collected.Ali investigator should be familiar with financial data such as; composition of assets&liabilities,operating percentages,&basic ratios. He/she must also have the capability to spot working capital deficiencies,inventory buildups, equity needs&other sign of problems that an investigator thinks relevant to ask.An investigator should be familiar with credit&financial terminology.The terms in this area r trade term,description of different forms of lending arrangements,terms commonly used by banks&lending arrangements, commonly business credit personnel in describing business&financial conditions.He/she should also be knowledgeable with the code of ethics for the exchange of credit information&the statement of principles for the exchange of credit information between hanks&business credit grammars.An investigator should be fully aware of the ramification involved in the exchange of commercial credit information.An investigator should also be able to contact consulates,embassies,trade development offices.(Heinemeyer 1980)} To investigate we need credit information? What r the major sources of credit information? :-A . I n f o r ma t i o n S u p p l i e d b y t h e C r e d i t A p p l i c a n t : - T h e f o l l o w in g in f o r ma t io n c a n b e o b t a in e d f r o m t h e a p p l ic a n t :- T y p e & a mo u n t o f l o a n , P r o p o s e d so u r c e s o f r e p a y me n t , P l a n o f r e p a y me n t , N a me o f c o l l a t e r a l o r - gu a r a n t o r s , N a me s o f p r e vio u s & c u r r e n t c r e d it o r s , L is t o f p r ima r y c u s t o me r s & t r a d e s u p p l ie r s , F ir ms a c c o u n t , P r in c ip a l o f f ic e r s & S h a r e h o l d e r s , P e r so n a l & b u s in e s s h is t o r y , T h r e e o r mo r e y e a r s f in a n c ia l st a t e me n t s , P e r so n a l in c o me t a x r e t u r n s , B o r r o w in g a u t h o r it ie s , I n s u r a n c e & c o n t in u in g gu a r a n t e e s . B . L e n d i n g O f f i c e r ' s Q u e r y : - Th e l e n d in g o f f ic e r ma y in q u ir e in f o r ma t io n r e l a t in g t o C h a r a c t e r is t ic s o f b o r r o w e r s ma r k e t , S a l e s & d is t r ib u t io n c h a n n e l s , P r o d u c t io n p r o c e s s , L a b o r r e l a t io n ,E x p e r ie n c e & e d u c a t io n a l b a c k gr o u n d o f p r in c ip a l o w n e r o r e x e c u t ive s , N a me o f ' t h e p e r s o n w h o w il l t a k e c h a r ge in a b s e n c e o f c u r r e n t C h ie f E x e c u t i ve O f f ic e r ( C E O ) , F ir m s t r a t e gic p l a n n in g p r o gr a m, T e n t a t ive d if f e r e n c e o f p r e se n t ma r k e t & f u t u r e ma r k e t o p p o r t u n it y , C o mp r e h e n s ive s t r e n gt h & w e a k n e s s o f t h e f ir m , P e r s o n a l l ia b il it ie s o f a p p l ic a n t s & gu a r a n t o r . C . I n t e r n a l S o u r c e s o f i n f o r ma t i o n : - I n f o r ma t io n ma y a l so b e c o l le c t e d f r o m t h e f o l l o w in g s o u r c e s : - C r e d it f il e o f p r e s e n t o r p r e vio u s b o r r o w e r s , D e p o s it a c c o u n t o f p r e s e n t & p r e vio u s c u st o me r s , P a s t p a y me n t p e r f o r ma n c e , P r in c ip a l c u st o me r , s u p p l ie r s & o t h e r c r e d it o r s ( T h r o u gh a c c o u n t a n a l y s is o f a p p l ic a n t ) , Income from investment&employment,(( )Income tax returns,Depreciation&other information from income tax returns. D.External Sources: -Following external sources may also be used to collect information about borrowers&his business:-1.Central bank credit information bureau (CIB).2.Commercial publications:(a)Stock exchange publications,(b)Special purpose directories,(c)Articles on published trade publications. Explain centralization & decentralization of investigation with their categorization? :-The success of bank's credit investigation depends largely oil the bank's organizational structure&the scope of its responsibility.Structure of inve stigation varies from bank to bank.Some uses centralized&some decentralized form of credit investigation.Several variations of' centralization&decentralization exist among the banks&have been created to meet among individual bank&customer needs.Some of the basic ones categorized r as Follows:-1.Completely Centralized: -In a completely centralized investigation unit is responsible for all foreign&domestic&answering of references inquiries oil customer accounts.This form is usually adopted by banks with a limited number of branches&where lending to major customers is done front the main office .2.Partially centralized:-a)Foreigndomestic:Foreign investigations r decentralized while domestic investigations r completely centralized.It is applied where there is a large overseas network.This separation also occurs when a bank is structured around international&domestic departments&each department services its own customers.b)Accounts-non accounts:Non-account investigations r centralized,but account investigations&the answering of inquiries oil accounts r decentralized i.e.they r handled by the appropriate branches. c)Centralized with exceptions: -These exceptions usually include specialized departments such as real estate,consumer lending,personnel,finance companies etc .All other departments would work through centralized account&non -account investigation units.3.Completely Decentralized: -In this form,each department or branch services its own needs&possibly those of its customers,including account&non -account investigat ions.This situation usually occurs where banks

assign customers to specific groups that r responsible for all services (Ileincilleyer 1980,27 -28).A complete credit investigation should result the accumulation of adequate information with respect to every significant factor pertinent to the applicant.Heinemeyer suggested the following principal factors on which attention should be given at the time of credit investigation:-Antecedent history,of the company,Experience&ability of the company's management,Exact nature of the company's operation,Company's present financial condition&conditions that existed for the past three to five years,including a review of financial statement&other statements,(e )Conditions of the company's plant,Experience&opinion of banks regarding the company,Trade opinion&ledger experience of regarding,Trade opinion&ledger experience of concerns from which the company has been purchasing,Trade competitor's Opinions,Conditions both within&without the industry,Extent&nature of government competition&regulation,&effect of present/Government prospective legislation? Define credit analysis? :- Credit analysis is the process whereby both quantifiable&subjective factors r evaluated simultaneously&judged (Libby 1979)describes the main task of credit analysts,is to judge the prospective borrowers' ability&willingness to pay the obligation as stated in the loan agreement.It also analyzes many other internal factors of bank's such new as portfolio composition,regulatory constraints etc.Credit analysis is not a u v Concept.It is the shorthand interpretation of information in which the organization is interested(Rwegasira 1999). Credit analyses r made to identify&isolate financial&other non-financial strengths,weakness of the borrowers or his/her organization.For accepting a company,financial analysis i.e.financial returns&costs of a company,economic analysis i.e.effect of the operation on the economy r generally measured. Contained therein r reliable.In using credit analysis models,a credit officer uses information collected from various sources but models based on information from companies annual financial statements r better able to predict bankruptcy.However,a qualified audited statement may reinforce the models findings&thus give greater prediction confidence that the company will be in financial trouble (Firth 1980). What r the role of financial information in credit decision making?:In order to talk meaningfully of the specific role of financial information&analysis in the credit officer's decision making process,it is necessary to know more specifically how the credit officer arrives at his decisions.For this discussion,Rwegasira(1992)developed&used a simple&perfectly specified decision model to study decision making process the role of information in credit&the model is.Assume that a credit officer is faced with:-1.A set of mutually exclusive&exhaustive courses of action to be denoted by(L.A specific course of action will be symbolized by a,where a - to simplify the analysis.2.A set of mutually exclusive&exhaustive future outcomes associated with each possible action in the set a,to be signified by B with a specific outcome denoted by b1.This set also will be assumed to have only to outcomes:b,- the loan will be repaid&b2- the loan will be defaulted. Only one of the two will occur.3.A set of probabilities P(b)attached to the future outcomes.In this case P(bl)&P(b2)correspond to the two assumed future possible outcomes. 4.a set of utilities indicating the credit officers' subjective preference with respect to the possible outcomes.These utilities r defined for each possible combination of action outcome&denoted by U(a,b).If the credit officer behaves according the expected utility theory,he will be choose action a with the highest expected value of utility.The expected utility from selecting a specific course of action a,to be denoted by E(U/a )is:{1.1>E(U/a)= U(a,b)P(b)},{1.2>E(U/a)= max E(U/a)=maxU(a,b)P(b)},{1.3>11P(b1)+12 P(b2) 21P(b1)+ 22P(b2)}.From the mathematical expression 1.3,it is clear that once the set of actions,the set of outcomes&utilities r known,they r fully specifically and,by definition,r unaffected by information.Thus,the role of financial information within this context is to assist the credit of ficer,in conjunction with the non-financial information,to arrive at default probabilities of prospective business borrowers. Explain the optimal approach to lending credit officers financial analysis? :Rwegasira(1992)argued that credit officers credit analysis approach should has to have a good balance of both financial(accounting)data&non-financial factors,with the information about the latter forming a contextual stage for the analysis&appreciation of the former.He opined that such an approach should take advantage of an integrated analysis,which mixes intuitive sensitivity&analytical incision,responds to qualitative as well as quantitative data,&blends insight&wisdom with management science. Step1:Review&analyze the socio economic&political environment,always looking for those factors or developments(esp.ill industry)of significant bearing to the lending decisions.Step 2:-Examine the nature&purpose of the loan.Step 3:-Compare the loan with the general bank lending policy.This assumes the bank lending policy will provide broader guidelines as to implications of economic&social policy&law; stipulate the range&degree of risks acceptable;&indicate delegated authority in lending decisions at various levels of organization. Step 4:-Scrutinize the borrower's personality&assess if it is acceptable.For an individual,one would be looking at his character,but for a company one should look at what may be called "corporate personality" in organizational behavior.Step 5:-Classify the loans according to money volume involved&degree of national as well as organizational priorities.The consideration of money volume is supposed to reflect also the degree risk associated with the loan.This procedure n1a),be a necessary step before financial analysis is done.Step 6:-Do the financial analysis.Classifying before doing financial analysis implies that varying emphasis is going to be put on the results of this analysis itself is going to be approached slightly different from one class of the loans to another.The goal of financial a nalysis is to diagnose ability to pay.Step 7:-Check for security offered or some other consideration which may meaningfully compensate for deficiency,if any,in financial strength or character. Step 8:-Provide financial advice which could preferably be used to reshape the credit application where possible&necessary (Rwegasira 1992,48-49). What r the components of credit analysis - explain?:Scholarly literature has developed some basic components of credit analysis which we term as "Cs of credit".Here is a brief description of the principal Cs of credit:C:Character,C:Capital,C:Capacity,C:Collateral,C:Consequences,C:Cash Flow,C:Condition,C:Current information,C:Customer relationship,C:Corporate life cycle,C:Economic Condition.

Character:-In commercial lending,character refers to the client's willingness &determination to meet loan obligations.Unlike(lie financial performance indicators that appeal )on balance sheet ,character is an inner quality that is exhibited by such qualities as integrity,stability&honesty.Responsibility,truthfulness ,serious purpose,&serious intention to repay all monies owed make up what a credit officer calls character (Rose 2002,528).For a single person it is the character &for big companies or firms it is the corporate personality .The concept of corporate personality is a relatively new- construct even in organizational theory .Corporate personality or character is related to thy profile of behavioral characteristic which distinguishes a firm as an individual entity&gives it its image identity&guides its decisions.Lucas(1973,66-76)suggested the followings; a credit officer should look at the answer of these questions for Judging character of a borrower:-(1)Does lie have proven honesty? What is his past credit history?(2) What is his experience in this field?(3)What is his expertise in his field?(4)What r his administrative abilities? Is lie all organizer-planner-can lie supervise people?(5)Intelligence - is he quick to see a problem&then act to correct?(6)Is he ambitious or lazy?(7)How does lie communicate with you as a loan man?(8)What r his habits&how does he conduct his personal life? Capital:-Capital represents the funds available to operate a business ,of which there r two portion viz.equity capital that is invested in the business by the owners&the borrowed capital that is borrowed from other sources.Credit officer should concern about the equity capital because more the equity capital more sincere would be the owner about their stake hence more safeguard wi ll be the borrowed funds.Lucas(1973,66)advocates that a credit officer can judge the stake of owner by investigating the following aspects:-(I)The value of assets.(2)The value of liabilities.(3)Whether equities he has in his assets give adequate backup foe .:his loan request.(4)Whether capital increased from profits or form appreciation in stating assets.(5) What assets&stating liabilities does he have outside the business? Capacity:-Ruth(1990,99)defines capacity as, Management ability to generate enough ca sh to satisfy all obligations is defined as capacity. Capacity also means borrowers' business acumen&management ability to deal with mean matters so that he would be able to make effective &profitable use of funds,thereby able to repay the dues(Srinivasa 1986,18).It is easier to evaluate the capacity of a going,concern by past financial performance &reputations.The followings r the indicator by following which one can judge the repayment capacity of borrowers :-(1)Collection of notes&accounts receivable (2)Income,earnings,or new equity contributions(3)Borrowing other source(4)The education&I experience of each member of management(5)Involvement in other enterprises etc. Collateral:-Collateral is the secondary sources of repayment .If the cash for repayment of a loan is not available from the earning of the business then collateral is used for repayment of the loan.Collateral offsets the weakness of other cash .In most of the banking system,collateral is mandatory.The key aspect in the collateral is the use of a test of reasonableness about true current values.Maintenance of adequate margin collateral is only as good as the documentation required to perfect it.Dealing with collateral,a credit officer should keep in mind the followings:-(1)Possession of the assets(2)Valuation(3)Age,condition,technology,(4)Marketability etc. Consequences-Purpose:-In making granting decision,a credit officer should confirm the purpose of the credit.Lucas(1973)suggested that to gain an insight into the purpose of the credit ,a credit officer should inquire about the questions:-(1)Is the loan a productive one? (2)Does the loan replace other creditors?&Why?(3)Will the borrower&the bank benefit on both short term&long-term basis? How is it in each case? Cash flow:-Credit from banks can be paid only with cash.Banks cannot barter with a loan of grain,a bale of cotton,&a piece of equipment or an account receivable .In judging credit request,the credit officer must be sure that,the borrowers have the ability to generate enough cash ,in the form of cash flow,to repay the loan.There r three sources of generating cash to repay the loan :-[{(1)Cash flow from sales or income(2)Sale or liquidation of assets(3) Funds raised by issuing debt or equity securities.}]However,credit officers have a strong prefe rence for cash flow from sales or income as a principal source of repayment .By analyzing cash flow the by growth,analyzing lender can get two answers:-(1)Will the expected cash receipts of' a business the term of a loan be adequate to meet all required cash payments?(2)Has the firm the financial flexibility to survive a period of adversity where the firm failed to generate enough cash flow? By analyzing cash flow lender can also gain an insight into causes of loan purpose ,repayment sources,estimation of fund needed to finance. Conditions:-Condition means market of economic conditions is one of the traditional us.Conditions suggest a forecast of the most likely sale figure &profitability for the coming,year.However,when times r hard or things r not going well,it officer should search to find the answer to the question :Can the customer still have the ability to repay the loan? To get the answer sensitivity of conditions analysis is also a critical issue in credit analysis(White 1990,11).To credit analysts it is important to know just what regularities(relation)exist&what changes might be occurring with the changing economic condition. Current Information:-To make good commercial lending decisions,credit officers need useful information about certain critical variables(Kemp et al.1990).Information is of 2 types:financial&non-financial.To make a good credit judgment financial as well as non financial information should be taken into consideration .A credit analyst can get financial information from the published financial statements &other published records.For getting non financial information Credit analysts should look at the management ability &uses his/her experience for analyzing it .Financial statements contain lot of information .A lot of models have been developed for credit analysis where financial(Altman "Z score)&financial&non financial information(LRA,VaR etc)given proportionate weight. Customer Relationships:-Customer relationships come into play in answering the question "Will the customer repay." If credit officers have existing relationships with customers ,then they have additional information&experience to bring to the analysis.If credit officers do not have this experience,they will need to gather information to decide whether they want to have a relationship with these customers or not .It is a conception that a customer of another institution approached for credit will be treated as "red flag" .In this case a credit officer should look for the answer why didn't the customer borrow from his or her existing institutions.Customer relationships also relate to the question "can the customer repay".A credit officer can procure the answer from information about past credit experience with his/her institution (White 1990). Corporate Life Cycle:-There r 3 stages of corporate life cycle.viz .growth,mature&decline stage(Kane et al.2003).Growth stage firms r characterized by younger ,smaller,less well capitalized,limited line of credit.Suppliers r reluctant to extend liberal terms of credit to these firms&these firms have limited access in the capital market .Declining firms r characterized by limited access in the line of credit,high cost of financing.For both growth&declining firm's internal cash resource is important to avoid distress.For mature firms one should expect that firms be relatively more focused on cost efficiency .For mature firm analysts should look at whether firms r in maintaining sufficient competitive advantage &related efficiency such as "economics of' scale" premium pricing from effective product &service differentiation,&/ or low cost advantage from inputs such as labors,suppliers&so forth . Economic Condition:- For credit analysis,analysts should consider the economic indicators .Literature
supports that economic indicators like unemployment rate,inflation rate,bankruptcy filings,&stock markets return have strong power for forecasting credit risk .Credit assessment is not an exact science.There is no single item of information,such as a single financial ratio can ever be appropriate to decide whether a company is a good credit risk or not.The analyst must assemble a variety of information ,both financial&nonfinancial,to make a well-reasoned assessment of the risk involved in giving credit to the customer(Credit Risk Management Series 1992) .With the innovation of computer&modern mathematical tools it is possible within minutes to conduct an,extensive analysis of ratios ,trends,margins,industry comparison ,working capital need,liquidity,leverage,capital adequacy,assets turnover,&cash-flow(Still 1984).