Report For Credit Analysis Of Market Competition

Lending requirements of customers

Explain about the Report for Credit Analysis of Market Competition.

1: Lending requirements of different types of customers varies depending on the purpose of the loan and also the economic background of the client. While investigating the various lending requirements of the client an official has to be aware of several aspects which might influence the customer’s economic profile. The official should start the conversation with a detailed explanation of the services that are provided to the customer from the organization and the benefits the client is entitled to depending on the stature of his business with the organization. Apart from that, the official should also iterate the services that the customer will not be eligible for since it helps in managing stakeholder expectations. Then the official should focus on understanding the need of the customer and allow him to give a detailed explanation of the various requirements from a financial perspective that he or she is having. This interaction should be an interested one and the official should delve deep into the conversation to have a proper understanding of the client requirements though the customer should not feel uncomfortable by the questions and the official should never encroach upon private information of the client (Shenbagavalli et al., 2015). The client may be from a different social and economic background which has to be kept in mind for the official and accordingly he has to sensitize the client depending on the case. The client may be in certain financial turmoil which would lead him to certain emotional outbursts or reactions which have to be dealt in a calm and maturated way by the official. Throughout this transaction, the official should be able to build a rapport with the client so that he or she slowly starts trusting the official and his services which would lead to long-term business for the organization. Apart from these, the official has to maintain professionalism and his communication to the client must be reassuring so that at any point the client does not feel insecure while going through the booking process (Molins and Vives, 2016).

2: The entire client interview for a loan has to be documented so that it can be referred to whenever required. Apart from that, there should be a well-established process for loan clearance so that all the proper checks and balances are cleared before any payout. The below chart is a typical example of the loan disbursement process which should be followed.

Loan disbursement process

The conversations that happen over the telephone should also be recorder and documented at the proper place. Technology enabled solutions has made life easier for every one of us and banking solutions is quite popular in this aspect. All the data that needs to be gathered from a client regarding his income source, debt, assets, and liabilities, etc. has to be incorporated in a database so that anyone can access them even at a later point in time and make judgments whether to do business with them or not (Gourlay, 2001).  There should be different layers of security for the storing and accessing of those data and as they are private and confidential information clients they should not be misplaced at wrong hands. Documentation is extremely important for a loan disbursement process since before giving out any loan a lot of stakeholders take a look at the financial credibility of the client. This is only possibly if the officer at the front end who is interacting with the client stores or uploads the required data on a common platform which can be accessed by people with the required clearances. Every front end officer can be provided with a handheld palmtop which can be used to collect data from prospective clients and fed directly into the client profile. Later anyone can access the client profile to make her analysis so that a judgment can be made about giving loans or not (LIU, 2012).

3: Corporate clients have complex requirements for different projects they undertake and these calls for a thorough and intricate analysis of the client data before going forward with the loan process. Client profile analysis has to be segmented into two buckets namely the financial profile and business profile. These two profiles need to be separately analyzed and come up with a recommendation regarding the loan. The business profile analysis revolves around understanding the business model and the different factors which influence them. The revenue drivers and cost drivers of the business have to be understood with a view towards forward outlook for the business (Dimitras, Petropoulos, and Constantinidou, 2002). The business analysis can again be subdivided into two sections which include macro analysis and business level analysis. There are certain macro factors which influence the prospects of business like GDP growth rate of the country, oil prices, Current account deficit, inflation, etc. Apart from these, there is a certain business level analysis which needs to be done which affects the particular business and not the whole economy like competition or certain product innovation. All these factors need to be critically evaluated for a better understanding of the business prospects. The financial analysis revolves around number crunching based on the financial statements of the client. Certain parameters like debt-equity ratio, interest coverage ratio, gearing, debt maturity profile, etc. reveal the financial health of the organization. After the two analyses are completed, then the officer should have a clear understanding of the client’s economic profile and based on that knowledge the loan should be structured. There are considerable amount of liaising that takes place before the finalization of the term structure of the loan since all the credit analysis is undertaken by departments other than the front end officer. Since a lot of stakeholders are involved in the loan structuring and decision making there is a need for diligent liaising. If there are inherent risks associated with the loan, then there should be strong covenants while structuring the loan agreement which ranges from several restrictions like limiting the debt-equity ratio to restricting management authority on certain aspects of the business. The officer should take help of these tools while structuring the loan for his or her client who would enable a proper and smooth business process (Duellmann, Scheicher, and Schmieder, 2008).

Corporate client analysis

4: Risk is inherent in any business, and there should be appropriate control measures to mitigate risk. The purpose of risk measurement should never be to limit business, but it should enable doing business in a more controlled manner so that there are reduced the risk of defaults. Risk can be categorized into several buckets as per the operation in which the risk is being measured. The four broad categories of risk include operational risk, credit risk, market risk and liquidity risk. Risk should be evaluated before going forward with the loan process, and there are several tools available which can be used to measure risk in a quantitative as well as qualitative sense. Assets should have popper evaluation criteria and valuations should be performed based on DCF or relative valuation methodologies (Cochran and Shelnutt, 2014). These valuations should be carefully monitored and needs to be frequently updated so that any significant event that changes the financial profile of the client is captured through the risk measuring tools. The value at risk and expected shortfall are some of the parameters which enable bankers to measure risk and monitor them frequently. Credit Risk measurement also involves calculation of risk of default which depends on two parameters which are the probability of default and the loss gave default (LGD) which measures the impact of loss once there is the default. These parameters are calculated to understand the credit rating of the client and interest is charged accordingly. These are some of the aspects related to risk measurement and controlling while it comes to loan structuring (Arthur and Graner, 2004).

5: There needs to be thorough pitching of the loan product like for example consider the lender being a big banking organization like Citibank. Loan products are purely functional products, and they have little emotional connect with the clients (Molins and Vives, 2016). Therefore the strategy for pitching the various loan products to the client should be focused mostly on the functional aspects of the product. The various advantages of the loan product should be clearly stated beforehand, and the limitations should also be iterated so that the client can map the benefits as per his requirements. This may also require consultation with other financial advisors of the clients since in few cases the client is not conversant with the various financial jargons and assets. Moreover, there is a requirement of apparently making him or her understand the different regulatory constraints which might limit his options or benefits from the loan product. The fees and commissions charged by the organization should be declared upfront so that there is transparency and effort should be taken to understand that client is completely cognizant of the offer benefits or terms and conditions (Diev, 2007).

Risk mitigation measures

6: The officer who is in charge of dealing with the client must undergo a thorough research of the client background and his economic credibility so that he can offer the best product as per the client requirements and eligibility. This aspect is more concerned with the marketing capability and identifying the appropriate target audience for a particular product. Every organization has a range of goods to cater to various client needs and it is the job of the officer to identify the proper client requirement rightly. For that to happen the officer should have a good understanding of the client profile and an in-depth knowledge of the different products that the company offers. Aright mix of these two capabilities will lead to the identification of appropriate clients with the necessary requirements which can be catered by a particular loan product (Ahn, 2010).

References

Ahn, J.-H. (2010) ‘Loan sales and Loan Market Competition*’, International Review of Finance, 10(2), pp. 241–262. Doi: 10.1111/j.1468-2443.2010.01110.x.

Arthur, J.D. and Graner Markus K. (2004) ‘An operational model for structuring the requirements generation process’, Requirements Engineering, 10(1), pp. 45–62. Doi: 10.1007/s00766-004-0196-2.

Cochran, R.J. and Shelnutt, H.T. (2014) ‘An examination of mortgage loan servicing rights in the aftermath of the Subprime mortgage crisis of 2006’, Accounting and Finance Research, 3(1). Doi: 10.5430/afr.v3n1p46.

Diev, S. (2007) ‘Structuring complex requirements’, ACM SIGSOFT Software Engineering Notes, 32(2), p. 1. Doi: 10.1145/1234741.1234755.

Dimitras, A.I., Petropoulos, T. and Constantinidou, I. (2002) ‘Multi-criteria evaluation of loan applications in shipping’, Journal of Multi-Criteria Decision Analysis, 11(4-5), pp. 237–246. Doi: 10.1002/mcda.332.

Duellmann, K., Scheicher, M. and Schmieder, C. (2008) ‘Asset correlations and credit portfolio risk: An empirical analysis’, The Journal of Credit Risk, 4(2), pp. 37–62. Doi: 10.21314/jcr.2008.073.

Gourlay, U.M. (2001) ‘Know your parent organization and your business Environment–Criteria for success’, Journal of Interlibrary Loan, Document Delivery & Information Supply, 10(1), pp. 37–46. Doi: 10.1300/j110v10n01_05.

LIU, G. (2012) ‘Municipal bond insurance premium, credit rating, and underlying credit risk’, Public Budgeting & Finance, 32(1), pp. 128–156. Doi: 10.1111/j.1540-5850.2011.01005.x.

Molins, J. and Vives, E. (2016) ‘Model risk on credit risk’, Risk and Decision Analysis, 6(1), pp. 65–78. Doi: 10.3233/rda-150115.

Shenbagavalli, R., Ponniah, V.M., Senthilkumar, S. and Abirami, P. (2015) ‘A credit risk analysis of banks: The users of credit cards influences financial and operational risk in banks leading to credit risk’, Asian Social Science, 11(5). Doi: 10.5539/ass.v11n5p65.

Skoglund, J. and Chen, W. (2016) ‘The application of credit risk models to macroeconomic scenario analysis and stress testing’, The Journal of Credit Risk, 12(2), pp. 1–45. Doi: 10.21314/jcr.2016.208.

Spadaford, J.F. (2002) ‘Reengineering commercial loan servicing at first Chicago’, National Productivity Review, 12(1), pp. 65–72. Doi: 10.1002/npr.4040120109.