Corporate Lending

MVL Consulting Private Limited

Makarand Lonkar | Ameya Lonkar
[email protected] | [email protected]
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Program process

• Inter-active sessions

• If you do not understand, ask immediately

• Reviews / questions during the sessions

• Post program support

• Speed of delivery

• Session breaks

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Agenda

Module 1: Corporate Lending Basics

Module 2: Loan Origination

Module 3: Credit Execution and Administration

Module 4: Problem Loan Management

Module 5: Corporate Lending Products

Module 6: Key Regulations

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Module 1: Corporate Lending Basics

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Introducing a Corporate Customer

Customers

Non-
Companies
Company

Small &
Non- HNI / Ultra- Large
Business Medium
Business HNI Business
Business

Private Retail Corporate

Small Medium Banking Banking Banking
Business Business

Retail Banking
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Introducing a Corporate Customer

How do we classify a business as a small / large business?

• Every bank can decide its own criteria (based on credit exposure, turnover, net worth etc.)

• As per Basel Accord II, corporates having exposure more than EUR 1 million can be classified as
corporate customer.

• In India, RBI prescribes exposure norm of INR 50 Million (INR 5 crores).

Why do we classify / identify corporate customers separately?

• Regulations

• Products and services

• Risks involved

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Corporate vs. Retail Banking

• How is it different from Retail Banking?

– Value of transactions

– Risk taken – also credit scoring against credit rating

– Type of market and currency

– Period of loan

– Negotiating power with a bank

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Why Corporates Need Banks?

• Money
– Capex: Fixed assets like buildings, equipment,
Finance
hardware, software

– Opex: Current assets like Raw material, Semi-Finished

Goods (SFG), Finished Goods, debtors

• Services
Risk
– Documentary credits and bank guarantees Management Banks Assurance

– Collection from customers (debtors)

– Payments to vendors (creditors) and others

– Foreign exchange services

Agency
– Advisory services

• Risk Management
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Twin Goals of Lending

How much amount is available to the bank for lending?

• Reserve requirements

• Capital adequacy norms

• Sector-specific lending

• Asset-Liability Management

What is relationship between risk involved in lending with interest rate?

• Higher the risk, higher the applicable interest rate

• However, risk should be within risk appetite

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How reserve ratios impact lending?

Investors deposit their

money in Banks Reserve is maintained

Balance available money

is given as a loan

Money used for transactions.

Payment made through Banks

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Asset-Liability Management

5 10 15
Jane
What risk does the bank face
Deposit $10,000 @ if Jane or Jack wants to withdraw
7% p.a. the deposit before maturity?

John Home Loan

$10,000 @ 10% p.a. What risk does the bank face
John prepays his home loan?
NIM = 3%

Deposit $10,000
@??% p.a. Deposit $10,000
Jack @??% p.a.
NIM =??%

What risk does the bank face Asset and

if Jane’s deposit is in USD and
John wants a GBP home loan?
Liability
Management
Net Interest Margin (NIM) 11
Interest Earned Less Interest Paid
Generic process of lending

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Generic Process of Lending

Determine Loan Underwriting

Credit Analysis
Credit Policy Application Decision

Complete
Collection /
Repayment / Disbursement Documentation
Recovery
Loss

Accounting | Monitoring | Administration | Compliance and Legal | Reporting

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Generic process of lending
RISK MANAGEMENT CREDIT POLICY

Origination Credit analysis Reporting Collections

Sales Credit Analysis

Financial Credit Disposal /
Reporting Recoveries
channels analysis analysis Risk mitigation

Exposure
aggregation

Credit Customer Portfolio

Risk rating Exposure
scoring management management
measurement

Credit decisions Drawdown

Collateral
Transactions
management
Collateral
Pricing & terms Credit limit
acceptance
Contracts &
Documentation
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Credit Analysis and Underwriting

Credit Policy Credit Rating

Underwriting Assessment and

decision valuation of security
AQR/BQR/CQR
Asset Quality Rating

Borrower Quality Rating

Ability to Pay KYC, Fraud check etc
Collateral Quality Rating

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Risk Management and Documentation

Risk management through Documentation

Proactive
• Limits
• Margin / Loan To Value (LTV)
• Covenants
– Positive covenants
– Negative covenants
Reactive
• Collateral
• Guarantee / credit derivatives
• On balance sheet netting

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Security Creation

Pledge Hypothecation Mortgage Lien Assignment

• Where the asset • Where movable • Where • Claim against an • Assigning the
owned by assets such as immovable asset - deposit. right to receive
borrower are machinery, assets such as money to get the
• For example, if
physically in the vehicles owned land and building loan.
you take a loan
possession of the by the borrower owned by the
against your fixed • Receivable
bank are given as borrower are
deposit, the bank financing or
security. given as security.
• E.g. Gold loan places a lien on invoice financing
• The asset • The asset the fixed deposit
remains in the remains in the
possession of possession of
the borrower. the borrower.

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Classification of loans / facilities

• Based on purpose • Based on repayment • Based on end-use

– Business / commercial – Installments – – Discretionary
– Retail / personal • EMI / Balloon / – Non-discretionary
Irregular or lifestyle
– Bullet payment
• Based on time • Based on funding
– Long term – Fund based / On
• Based on currency
– Short term balance sheet
– Local currency / – Non-fund based / Off
Foreign currency balance sheet
• Based on method of
utilization
• Based on interest
– Revolving • Based on security
– Fixed / Floating /
– Non-revolving – Secured
Stepped
– Unsecured

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Overview of IT Systems

Apple Inc. applies for Core Banking System

Term Loan against Plant
Scheme / Interest
& Machinery (P&M) Masters Customers
Product Rates

Charges GL Set-up

CLOS
Apple Inc. Term Loan SOFR + 2%
Applicant Details
P&M
Account Opening
Details
Loan Proposal and Loan Assets,
Disbursement Processing Income
Origination
Workflow Other Systems
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FCC Rating NPA MIS Billing
Syndicated Lending

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When syndicated loans are used?

• Loan syndication occurs when a single borrower requires a large loan that a single lender may be
unable to provide, or when the loan is outside the scope of the lender’s risk exposure.
• Lenders then form a syndicate that allows them to spread the risk and share in the financial
opportunity. The liability of each lender is limited to their share of the total loan. The agreement for all
members of the syndicate is contained in one loan agreement.
What is syndicated loan?

• A syndicated loan is a fundraising scheme in which an

“arranger” (a lead financial institution) forms a syndicate of
lenders to provide loans on the same terms and conditions
under a single contract to satisfy the funding needs of clients.
• A syndicated loan is offered by a group of lenders who work
together to provide credit to a large borrower.
• Each lender in the syndicate contributes part of the loan
amount, and they all share in the lending risk. One of the
lenders act as the manager (arranging bank), which
administers the loan on behalf of the other lenders in the
syndicate.
• The syndicate may be a combination of various types of
loans, each with different repayment terms that are agreed
upon during negotiations between the lenders and the
borrower.
Entities in loan syndication

• Arranger
– The arranging bank is also known as the lead manager
and is mandated by the borrower to organize the funding
based on specific agreed terms of the loan.

• Agent
– The agent in a syndicated loan serves as a link between
the borrower and the lenders and owes a contractual
obligation to both the borrower and the lenders. The
agent’s duty is mainly administrative.

• Trustee
– The trustee is responsible for holding the security of the
assets of the borrower on behalf of the lenders. Syndicated
loan structures avoid granting the security to the individual
lenders separately since the practice would be costly to the
syndicate. In the event of default, the trustee is responsible
for enforcing the security under instructions by the lenders.
The process

• The arranger receives a mandate from the

customer and composes a syndicate group.

• Services of the Arranger

– Establish Lending Terms and Conditions

– Invitation to Lender (Participating Financial

Institution)

– Make and Enter into an Agreement, etc.

• The Arranger may also participate in the

syndicate group.

• After Entering Into the Agreement

– The agent is the single point of contact with the
borrower customer for collection of money and
providing information.
Self Assessment: Rapid Fire

No Question Answers

1 If borrower will repay entire amount through single payment, it is called ____ repayment. Bullet

2 True or False: Recovery of loan outstanding is part of loan origination process False

3 A loan by providing building as a security is called as _________. Mortgage

4 True or False: Pari-passu charge means equal charge True

True or False: Credit rating is done based in historical financial data and does not need any
5 False
projected financial data from the issuer.

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