SAMPLE COURSE MATERIALS

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1 SAMPLE COURSE MATERIALS THE CREDIT SKILLS ACADEMY A Digital Learning Resource Centre Knowledge at your fingertips! On demand; anytime/anywhere - Continuous Credit Training Corporate Intranet or Internet Based Access on computer; laptop; tablet or suitable cellphone. Keith Checkley & Associates (UK) working in association with Caribbean Association of Banks Inc. Content Development The Academy has been constructed based on our extensive Banking Training experiences over more than 30 years in many Overseas and UK locations Academic content has been taken from our directly related topic authored Books and other relevant sources A Digital network of E information Access anytime/anywhere on computer/tablet/i pad or suitable cell phone - Progressive learning units - Academy Member activities - Case Study Questions and Key Learning Points - Personal Credit Assignment and Final test to graduate

2 DESCRIPTION OF MODULES Foundation Level Credit Courses Progressive learning units: Unit 1. Personal Lending Unit 2. Small Business Lending Unit 3. Larger Business Lending Unit 4. Business Lending and Security Unit 5. Problems with Business Lending Unit 6. Builders and Property Developers Unit 7. Finance for Farmers Unit 8. Trade Finance Unit 9. Specialist Services for Borrowers Advanced Level Credit Courses Progressive learning units: Unit 1. Credit Risk Management Unit 2. Business Risk Unit 3. Asset Risk Rating Unit 4. Large Company Analysis Unit 5. Cash Flow Early warning signals Unit 6. Syndicated Loans Unit 7. Specialised Lending & Project Finance Unit 9. Corporate Recovery in Action

3 FOUNDATION LEVEL CREDIT COURSE EXTRACTS FROM UNIT 2 SMALL BUSINESS LENDING Key Assessments Areas The key areas for risk assessment, which need to be examined are: The customer and his business asset cover for the advance (and security) repayment ability/serviceability of debt monitoring of performance. These areas are shown diagrammatically. This diagram should be studied carefully in order to avoid the pitfall of lending to the applicant with little regard to the business, its net worth or serviceability! If any of the key areas is ignored, problems will be encountered sooner or later. A full assessment must be made to reach a balanced judgement. Key Assessment Areas The Customer The Business Asset Cover Security Net Worth Repayment Plans Serviceability Monitoring It is vitally important to remember that a business, no matter how strong its balance sheet, cannot carry a debt burden greater than can be serviced by the income earning capacity of the business. It is for this reason that great emphasis will be placed on understanding the trading profile of the business. This is displayed in the trading and profit and loss account and is projected in the profit budget.

4 FOUNDATION LEVEL CREDIT COURSE EXTRACTS FROM UNIT 3 LARGER BUSINESS LENDING Capital Project Appraisals CSA Member Activity 5 Before studying the next section, refresh your memory on your Accountancy studies. You will recall that the basic object of any investment is that after paying out a certain amount of cash today, a larger amount will be received back over a period of time. A lender of funds for capital investment has, therefore, to be certain that a realistic assessment of the project has been undertaken. From the accountancy perspective, there are four main methods of assessing capital investment projects: Payback - this involves the calculation of the time it will take to recover the initial outlay. Average Rate of Return (Return on investment) -this indicates the average annual percentage return on either the average or alternatively the total amount of the investment. Discounted Cashflow (Net present value return on investment) - this method involves the discounting of future cash inflows from the project. It adjusts the return to allow for the time value of money. Yield (or internal rate of return) - this method uses the same principles as the net present value approach but with the objective of establishing the discount rate at which the present values of the cash inflows and outflows match. Traditionally, project appraisal approaches have centered on either (a) Identifying the Payback Period of the project, or (b) Identifying the Accounting Rate of Return on the project. However, with the evolution of discounted cashflow techniques, there are more sophisticated approaches: (a) Identification of the Net Present Value (NPV) of the project cashflows, or (b) Identification of the Internal Rate of Return (IRR) for the project. Payback Method The payback period of a project is found by identifying the number of years it takes before the cumulative forecasted cashflows equal the initial cash outlays related to the project.

5 ADVANCED LEVEL CREDIT COURSE EXTRACTS FROM UNIT 1 CREDIT RISK MANAGEMENT Basell III Pillar I Enhanced Minimum Capital & Liquidity Requirements Pillar II Enhanced Supervisory Review Process for Firm-wide Risk Management & Capital Planning Pillar III Enhanced Risk Disclosure & Market Management Discipline Asset quality The asset quality rating reflects the quantity of existing and potential credit risk associated with the loan and investment portfolios, other real estate owned and other assets, as well as offbalance sheet transactions. The ability of management to identify, measure, monitor and control credit risk is also reflected here. The evaluation of asset quality should consider the adequacy of the allowance for loan and lease losses and weigh the exposure to counterparty, issuer or borrower default under actual or implied contractual agreements. All other risks that may affect the value or marketability of an institution s assets, including, but not limited to, operating, market, reputation, strategic or compliance risks should also be considered. The asset quality of a financial institution is rated based upon, but not limited to, an assessment of the following evaluation factors: 1. The adequacy of underwriting standards, soundness of credit administration practices and appropriateness of risk identification practices. A suitable generic model for credit evaluation is shown OVER:

6 EXTRACTS FROM UNIT 1 CREDIT RISK MANAGEMENT continued Diagnostic Credit Evaluation Model Financial Analysis Credit Process Lending Risk Returns- RORAC etc Non-financial Analysis Collatertal/Clean going & gone concern analysis Ref: Checkley Lending Published by London CIOB 1997 Credit decision & Risk Migration 2. The level, distribution, severity and trend of problems, classified, nonaccrual, restructured, delinquent and non-performing assets for both on and off-balance sheet transactions 3. The adequacy of the allowance for loan and lease losses and other asset valuation reserves 4. The credit risk arising from or reduced by off-balance sheet transactions, such as unfunded commitments, credit derivatives, commercial and standby letters of credit and lines of credit 5. The diversification and quality of the loan and investment portfolios 6. The extent of securities underwriting activities and exposure to counterparties in trading activities 7. Existence of asset concentrations 8. The adequacy of loan and investment policies, procedures and practices 9. The ability of management to properly administer its assets, including the timely identification and collection of problem assets 10. The adequacy of internal controls and management information systems 11. The volume and nature of credit documentation exceptions.

7 ADVANCED LEVEL CREDIT COURSE EXTRACTS FROM UNIT 7 SPECIALISED LENDING & PROJECT FINANCE Example Power Plant Project Finance Structure Government Concession/ Regulation Shareholders Construction Contacts Project Debt Financiers Guarantees/ Insurances Export Credit Agencies Political Risk Insurers Security/ Loan Payments Loans Investment Project Company Purchase/Off-take Agreements Fuel Supply Operating & Maintenance Agreements 2. Project Finance Checklist Definition: A financing of a particular economic unit in which a lender is satisfied to look initially to the cash flows and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan. Although the lender may be willing to look initially to the cash flows of a project for repayment as stated. The lender must feel comfortable that the loan will in fact be paid even on a worst-case basis. This may involve undertakings or direct or indirect guarantees by third parties. 2.1 Risks Inherent in Project Finance Initial Feasibility: The risks at this stage are borne by the equity sponsors. Construction Period: Still a high risk period. Project Finance lenders will endeavour to shift the completion risk to technically and financially reliable sponsors/contractors, as well as the responsibility for cost overruns. Operational Period: Project Finance lenders will have to rely on the underlying cashflows from the project and associated contractual arrangements during this stage.

8 EXTRACTS FROM UNIT 7 SPECIALISED LENDING & PROJECT FINANCE continued 2.2 Common Causes for Project Failures Delay in completion, with consequential increase in interest expense on construction financing and delay in the expected revenue flow Capital cost over-run Technical failure Financial failure of contractor Government Interference Uninsured casualty losses Increased price or shortages of raw materials Technical obsolescence of the plant Loss of competitive position in the market Poor management Overly optimistic appraisals of value of pledged security e.g. oil/gas reserves Financial insolvency of host government 2.3 Successful Project Financing Checklist Credit risk rather than equity risk involved Satisfactory feasibility study and financial plan prepared Cost of product/raw material to be used by the project has been assured Market exists for the product, commodity or service Transportation available at reasonable cost to move the product to the market. Adequate communications available Building materials available at cost contemplated Contractor, Operator, and Management Personnel are experienced and reliable. New technology not involved Contractual agreement among joint venture partners, if any, is satisfactory. Stable, friendly political environment exists; licences/permits available; contracts can be enforced; legal remedies exist. Country/Sovereign risk satisfactory Currency and foreign exchange risks addressed Key promotors have made an adequate equity contribution. Project has value as collateral Satisfactory appraisals of resources and assets have been obtained Adequate insurance coverage is contemplated Force majeure risk has been addressed Cost over-run has been addressed Delay risk has been considered Project will have an adequate ROE, ROI and ROA for the investor Inflation rate and interest rate projections are realistic. Environmental risks are manageable/legal Compliances are met

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