Philosophy of Lending
A lender “lends” money and does not give it away, he/she applies judgment that at some future date repayment will take place. The lender needs to look into the future and ask the question whether the customer will pay at agreed date. There will always be some risks that the customer will be unable to repay. In assessing the risk of non-repayment the lender needs to demonstrate both skill and judgment. The lender’s objectives are to assess
the extent of the risk and try to reduce amount of uncertainty that exist over the proposed repayment period.
While there are guidelines to be followed there is no “magic” formula. The lender must gather enough and relevant information and apply skills in making a judgment. The skills applied in one the proposal may never apply in another that is why experienced lenders describe lending as an “art” rather than a science. Lenders must seek to arrive at an objective decision. The approach of true professionalism is to resist outside pressures and
insist on sufficient information and time in order to understand and evaluate the proposal.
A lender who is confident in his / her ability will apply the following:
i) Take time to reach a decision because detailed financial information requires time
to be absorbed.
ii) Get a second opinion from another experienced lender
iii) Get full information from customer and not to rush in making assumptions or “fill
in” missing details.
iv) Not to take customers statements at face value ask for evidence.
v) Distinguish between facts, estimates and opinions when forming a judgment.
vi) Think again when “gut reaction” suggest caution even though factual assessments
look satisfactory.
1.2 Methodical Approach to Lending
There are five stages in analyzing a new lending proposition.
i) Introduction to the customer
ii) Application by the customer
iii) Review of application
iv) Evaluation
v) Monitoring and control
i) Introduction to the customer
Lenders can only do successful business with individual they know and feel comfortable with. References are not taken only every occasion an account is opened. Nevertheless, all the account opening procedures should be followed. Account opening procedures must be followed to the latter to ensure that the customer is honest and trustworthy. This is especially important when the customer wishes to borrow at a later stage. An important
source of new business to lenders is introduced from professional advisors such as accountants and advocates. However this not to say banks are obliged to lend to customers introduced in this way. The lender must treat each case on its merit.
ii) Application by the customer
This can take away many forms but should include a plan for repayment of borrowing and an assessment of contingencies which might arise and how the borrower will deal with each item. The application may be in a detailed written form or verbal. The lender must draw out sufficient further information to enable risks in the application to be fully assessed.
iii) Review of application
At this stage all relevant information which is required needs to be tested and other data sought if necessary. Either formally or informally the lender applies the canons or principles of lending. It is sometimes difficulty to remember all the points to cover during an interview and many lenders use a mnemonic as a check list. There are a number of mnemonics in common use, but the most common are CCCPARTS (Character, Capital Capacity, Purpose, Amount, Repayments, Terms, and Security), PARSER (Person,
Amount, Repayment, Terms, Security, Expediency, Remuneration) and CAMPARI (Character, Ability, Margin, Purpose, Amount, Repayment, Insurance). CAMPARI is the most popular of the mnemonics and will be discussed later.
iv) Evaluation
Once all available information has been assembled, an evaluation of proposal should be made. It’s done in two stages:
a) An assessment of the feasibility of the borrowers plan for repayment. If the proposal is not viable it’s pointless to continue.
b) A critical appraisal of what might go wrong. It involves likelihood of such events occurring and the effect on bank’s position.
The aim of this evaluation is to establish risk involved. Listing the pros and cons of a proposition is helpful more regard is placed on facts and evidence rather than estimates and opinions. Once a lending has been made, the risk lies in the way the customer handles any problem which might arise. The lenders evaluation concentrates on understanding borrower’s risks and assessing the borrower ability the deal with them. In cases where the lender feels that the risk is not bearable, and wishes to help a good customer advice the customer to the ‘re-engineer’ it into a more acceptable form.
v) Monitoring and control
It’s highly unlikely that is a customer expectation will exactly go as planned. It’s therefore necessary for lenders to review progress regularly. The earlier the problems are identified the better will be the chances of controlling them and providing practical advice to the customer which in turn protects lenders position. Regular monitoring of
corporate account can also enhance the lenders image on eyes of customer. This provides
evidence to the customer of a wish to understand the underlying business and to be
involved in solving future problems. A monitoring plan should be established at the beginning and where provision of regular information is necessary suitable arrangements should be made and a follow-up.
