Credit Analysis and Lending Management Dương Tấn Khoa
Credit Analysis and
Lending Management
ThS. Dương Tấn Khoa
School of Banking - UEH 1
Credit Analysis and Lending Management Dương Tấn Khoa
Course descriptions:
This subject offers insight theories and practice into the
credit analysis and lending business at commercial
banks
Students will be equipped with specialized knowledge
related to lending activities such as: the lending
process, financial statement analysis, working capital
financing, project financing, collateral analysis and
valuation....
Graduated students will be able to develop their
careers in investment banks, funds, asset management
companies, securities firms, commercial banks.
School of Banking - UEH 2
Credit Analysis and Lending Management Dương Tấn Khoa
Course objectives:
Understanding the nature of lending business in
commercial banks.
Being able to understand and provide credit products
Being able to analyze and suggest credit decisions.
Apply critical thinking, problem solving and
presentation skills to individual and/or group activities
dealing with investment banking.
School of Banking - UEH 3
Credit Analysis and Lending Management Dương Tấn Khoa
Course assessment methods:
Mid-term test: 50%, opened test:
Test 1: 30%
Group Assignment: 10%
Attend class: 10%
Final test: 50%, opened test
School of Banking - UEH 4
Credit Analysis and Lending Management Dương Tấn Khoa
• Textbooks:
– Credit analysis and lending management / Milind
Sathye, James Bartle, Ray Boffey, 3rd edition
School of Banking - UEH 5
About the lecturer
Full name: DƯƠNG TẤN KHOA
Mobile number: 0909.243.600
Email: tankhoa@[Link]
Qualifications:
• Master of Commerce –
Finance (Honors) – The
University of Melbourne –
Australia.
• BA of Finance and Banking –
UEH (Honors)
Current position
• Vice Dean of School of
Banking - UEH
• Manager of Investment Bank
program - UEH
6
Credit Analysis and Lending Management Dương Tấn Khoa
Chapter 1:
The Principles of Credit
Business
ThS. Dương Tấn Khoa
School of Banking - UEH 7
Credit Analysis and Lending Management Dương Tấn Khoa
Credit business
Constitutes one of the most important functions
of any bank
Around 70% of bank’s assets are invested in
loans and advances.
If the lending function is not well managed, it
could threaten the existence of the bank
Due to the credit quality problems
To mitigate the credit quality problems,
adequately trained staff are required
School of Banking - UEH 8
Credit Analysis and Lending Management Dương Tấn Khoa
Credit business (cont.)
Credit includes a wide range of products:
Lending (the most common product in Vietnamese
banking system)
Discounting
Factoring
Overdraft
Bank Guarantee
Credit card
Leasing
Other types of credit activitives
School of Banking - UEH 9
Credit Analysis and Lending Management Dương Tấn Khoa
Why do we need to do credit analysis (or
Due diligence)?
Can you – as a credit officer – trust your
customer?
The customer has more information related to
her ability and willingness to repay the loan
The bank must do due diligence to fully evaluate
its customer before making any credit decisions
School of Banking - UEH 10
Credit Analysis and Lending Management Dương Tấn Khoa
What is credit analysis (or Due diligence)?
❖Due diligence is an investigation, audit, or
review performed to confirm facts or details of a
matter under consideration.
❖Due diligence requires an examination of
financial records before the bank make credit
decision.
School of Banking - UEH 11
Credit Analysis and Lending Management Dương Tấn Khoa
The two important rules in lending
The customers MUST use fund to the promised
purpose specified in the loan contract
Repay the loan on time
School of Banking - UEH 12
Credit Analysis and Lending Management Dương Tấn Khoa
The principles of good lending
Safety the loan
Suitability of loan purpose
Profitability
School of Banking - UEH 13
Credit Analysis and Lending Management Dương Tấn Khoa
The principles of good lending
Safety the loan
Only grant loan to borrower who is considered safe
A safe borrower:
• Good character
• Financially sound
• Has ability and willingness to repay the loan
• Has adequate collateral or insurance (as a back-up plan
when things go wrong!)
Assumptions made when the loan is made go wrong
Circumstances change so dramatically
School of Banking - UEH 14
Credit Analysis and Lending Management Dương Tấn Khoa
The principles of good lending
Suitability of loan purpose
Only give the loan to valid purposes
A valid purpose is one that is legal and conforms to
the lending policy of the bank
School of Banking - UEH 15
Credit Analysis and Lending Management Dương Tấn Khoa
The principles of good lending
Profitability
Banks lend money to customers to earn profits
Banks must compare the cost and benefit of a loan
before granting it
Banks must carefully weigh the risks and return from
a possible loan
School of Banking - UEH 16
Credit Analysis and Lending Management Dương Tấn Khoa
In summary, safety, suitability and profitability
are three basic principles of prudent lending.
THE BANK UNDERTAKE CREDIT
ANALYSIS OF ALL LOAN PROPOSALS
School of Banking - UEH 17
Credit Analysis and Lending Management Dương Tấn Khoa
Traditional methods of credit analysis
The purpose of credit assessment (or credit
analysis or due diligence) is to measure credit
risk
Criteria to do credit analysis: 5C model
Character
Capacity
Capital
Collateral
Conditions
School of Banking - UEH 18
Credit Analysis and Lending Management Dương Tấn Khoa
Character:
Most important criteria
Most difficult to assess
It is about TRUST
Trust is like glass. Once it is broken, it cannot be
repaired. Even if repaired, the marks of such repair are
always present.
The concepts of character differ from countries to
countries, form cultures to cultures
Character assessment involves collecting information
about the borrower’s track record of integrity,
repayment ability, spending habits,…
School of Banking - UEH 19
Credit Analysis and Lending Management Dương Tấn Khoa
Capacity:
The ability to repay the loan together with interest
follow with the predetermined schedule
Capacity refers to financial capacity to repay the loan
To assess capacity, we need to answer two main
questions:
Is the borrower financial position is sound?
Will the borrower generate sufficient income to
service the repayment of the loan?
School of Banking - UEH 20
Credit Analysis and Lending Management Dương Tấn Khoa
Capital
Refers to the capital contribution that the borrower
proposes to make in the total investment
EX: Common rule is 70%-30% (the bank only lend
70% of the total investment)
The greater the capital, the greater is the
owner’s confidence in the project
the lender will feels confident about lending the
project
Lending against the strength of the security OR
lending against cash flow?
School of Banking - UEH 21
Credit Analysis and Lending Management Dương Tấn Khoa
Collateral
Also known as the secondary source of repayment
When the loan cannot be paid, the lenders usually sell
the collateral and use the proceeds to set off the
outstanding loan amount
Neve forget: Taking possession of the collateral or
selling the collateral is a long and expensive legal
process
School of Banking - UEH 22
Credit Analysis and Lending Management Dương Tấn Khoa
Conditon
An analysis of conditions covers external, internal
factors
External factors:
Condition of the economy
Condition of relevant industries
International events
The threat of war,…
Internal factors:
Lending policy
The lending budget
Expert staff to monitor the loan
School of Banking - UEH 23
Credit Analysis and Lending Management Dương Tấn Khoa
Sources of information for credit
analysis
Data collect from the borrower’s submitted
document
Data stored in the bank
Interview the borrower
Data from thord-party
School of Banking - UEH 24
Credit Analysis and Lending Management Dương Tấn Khoa
The lending process
Collect Make
Credit
required decision
Analysis
document
Collect Disburse
Monitor
repayment
School of Banking - UEH 25
Credit Analysis and Lending Management Dương Tấn Khoa
Thank You!!!
School of Banking - UEH 26