PRINCIPLES OF GOOD LENDING
EXAMPLE 1
Jeremy has maintained an account at your branch for many years. You have very little detailed information on file regarding him but you are aware he has business interests in the city. He is a director of three companies and from time to time sits up board of enquiry set by government.
No regular credits are seen in the account but over the past three years credits totaling Ksh 250,000 have been received including six dividends warrant amounting Kshs75, 000.
Nine months ago you wrote to him suggesting that the dividends should be mandated but there was no response to his letter.
Over 2 years ago Jeremy wrote to you regarding the prestige card issued by your bankcard company. Subsequently a formal application was made and a card was issued. As part of this facility an unsecured overdraft limit of 75,000 has been recorded on his account.
Today you receive a letter from Jeremy enclosing a cheque of Kshs200, 000 in his favour by a firm of Nairobi lawyers and three share certificates all in his name with a current market value of 800,000. He explains that he is involved in a small syndicate of investors they are about to complete the purchase of a significant investment in the US but at this time he can give no details. He is therefore likely to issue a cheque over the next week for Kshs 1,000,000 and asks you to increase his overdraft by 750,000. Set out in detail you reply to Jeremy.
Solution
Apply CAMPARI in your analysis
Character connection and capital initial reaction
This is a relatively a long standing customer who has presumably operated the account satisfactory. You would therefore wish to help if at all it’s possible especially because of the customers standing. Furthermore you do not have any advanced information about him. As a director of three companies and sitting on government board of enquiry shows that he is a person with vast business operations and of high integrity.
There is evidence of capital from share certificate of Kshs.800, 000 and annual dividends of Kshs.75, 000. He has also been issued a prestige card facilities unsecured. As far as connections are concerned they exists (evidence by board of directorship in three companies and sitting on government board of enquiries and the investment syndicate group). However you must not let this description influence your judgment.
Jeremy has satisfactory serviced his Kshs 75,000 prestige card facility. As the same time Jeremy could be having other account in other financial institutions. The bank needs to get clarification from him, what other bank account he holds, other securities and commitments and liabilities in order to evaluate his ability to repay the loan. Further more the source of repayment could also be from realizing investment from which the bank is being asked to finance. This required to be clarified.
Margin
This is a speculative venture as Jeremy and his group want o engage in overseas investment which he doesn’t have full information and even if he had all information the bank cannot adequately ascertain its accuracy as the investment is to be undertaken faraway in the USA. The bank should charge interest at a premium adequate enough to cover this high risk.
Purpose
This is not fully given and it’s presumably a speculative investment you need much information as to the investment and the payback period.
Amount
The bank is being asked to provide additional borrowing of Kshs 750,000 making the bank total exposure of 825,000 be fully utilized assuming he keeps the original limit of Kshs 75,000 overdraft. However you need to check this information.
The source of repayment is not given however if it is o come from realization of investor he must provide cashflow projections which must be by the bank. It’s possible that Jeremy is multi-bank and the bank must not have seen some of his income, its important to find out from him which other bank account he hold and facilities he is enjoying at the moment. The bank also needs to find out the duration of the loan (how long loan is required.)
Insurance / security
This proposal seem to be a speculative venture therefore the risk is high the bank therefore needs to be fully secured and although the share certificate current market value of 800,000 a margin of 20% is required giving security value of 640,000 which may not be enough to cover the borrowing.
Despite Jeremy excellent credentials, the bank does not have sufficient information to assess the risk attached to the proposal. A top businessman Jeremy should appreciate the need for further information if he really wants the bank to assist him. The proposal is declined at the moment as it is.
