Commercial Banking Bullet Points Final Test 1 Types of commercial banking loans Real Estate Loans Financial Institution Loans Agriculture Loans Commercial and Industrial Loans Loans to Individuals Miscellaneous Loans Lease Financing Receivables The largest category in dollar volume is real estate loans followed by loans to individuals and commercial and industrial C I loans Factors Determining the Growth and Mix of Loans Characteristics of the market area Lender size Wholesale lenders vs retail credit Experience and expertise of management Loan policy Expected yield of each type of loan Regulation General rule A lending institution should make the types of loans for which it is the most efficient producer 2 Bank regulators loan criteria for bank The mix quality and yield of the loan portfolio are heavily influenced by regulation Examples of lending regulations a The total volume of real estate loans granted by a U S national bank cannot exceed that bank s capital and surplus or 70 percent of its total time and savings deposits whichever is greater b An unsecured loan to a single customer normally cannot exceed 15 percent of a single national bank s unimpaired capital and surplus account legal lending limit Any loans made are subject to examination and review The Community Reinvestment Act of 1977 Selected lenders to must make an affirmative effort to meet the credit needs of individuals and businesses in their trade territories so that no areas of the local community are discriminated against in seeking access to credit The Equal Credit Opportunity Act of 1974 No individual can be denied credit because of race sex religious affiliation age or receipt of public assistance The International Lending and Supervision Act Requires U S banks to make public any credit exposures to a single country that exceed 15 percent of their primary capital or 0 75 percent of their total assets whichever is smaller This law also imposes restrictions on the fees lenders may charge a troubled international borrower to restructure a loan Uniform Financial Institutions Rating System Each banking firm is assigned a numerical rating based on the quality of its asset portfolio The federal examiner may assign one of these ratings 1 strong performance 2 satisfactory performance 3 fair performance 4 marginal performance 5 unsatisfactory performance Asset Quality Criticized loans Scheduled loans Adversely classified loans Substandard loans Doubtful loans Loss loans Establishing a Good Written Loan Policy Important in order to meet regulatory standards What should a written loan policy contain A goal statement for the entire loan portfolio Specification of lending authority of each loan officer and loan committee Lines of responsibility in making assignments and reporting information Operating procedures for soliciting evaluating and making loan decisions Required documentation for all loans Lines of authority for maintaining and reviewing credit files Guidelines for taking evaluating and perfecting loan collateral Procedures for setting loan rates and fees and the terms for repayment of loans A statement of quality standards applicable to all loans A statement of the preferred upper limit for total loans outstanding A description of the lending institution s principal trade area Procedures for detecting and working out problem loan situations Steps in the lending process 1 Finding Prospective Loan Customers 2 Evaluating a Customer s Character and Sincerity of Purpose 3 Making Site Visits and Evaluating a Customer s Credit Record 4 Evaluating a Prospective Customer s Financial Condition 5 Assessing Possible Loan Collateral and Signing the Loan Agreement 6 Monitoring Compliance with the Loan Agreement and Other Customer Service Needs 3 Camels CAMELS Rating a Capital adequacy b Asset quality c Management quality d Earnings record Liquidity position e f Sensitivity to market risk exposure All six dimensions of performance are combined into one overall numerical rating referred to as the CAMELS rating g Depository institutions whose overall rating is low tend to be examined more frequently than the highest rated institutions 4 6 C s Is the Borrower Creditworthy The Cs of Credit Specific purpose of loan and serious intent to repay the loan a Character b Capacity c Cash d Collateral e Conditions f Control Legal authority to sign binding contract Ability to generate enough cash to repay loan Adequate assets to support the loan Economic conditions faced by borrower Does loan meet written loan policy and how would loan be affected by changing laws and regulations 5 Elements to a loan agreement The Promissory Note Loan Commitment Agreement Collateral Covenants a Affirmative b Negative Borrower Guaranties or Warranties Events of Default 6 Types of short term business loans Self Liquidating Inventory Loans finished goods to sell a These loans usually were used to finance the purchase of inventory raw materials or b Such loans take advantage of the normal cash cycle inside a business firm c There appears to be less of a need for traditional inventory financing i Due to the development of just in time JIT and supply chain management techniques Working Capital Loans d Short run credit that lasts from a few days to one year e Secured by accounts receivable or by pledges of inventory f g A commitment fee is charged on the unused portion of the credit line and sometimes on Carry a floating interest rate the entire amount of funds made available h Compensating deposit balances may be required from the customer i Recently compensating deposit balances as a part of a business loan arrangement has been on the decline Interim Construction Financing i Secured short term loan used to support the construction of homes apartments office buildings shopping centers and other permanent structures Security Dealer Financing j Dealers in securities need short term financing to purchase new securities and carry their existing portfolios of securities until they are sold to customers or reach maturity k Retailer and Equipment Financing l Lenders support installment purchases of automobiles home appliances and other durable goods by financing the receivables that dealers selling these goods take on when they write installment contracts to cover customer purchases m Credit secured by the shorter term assets of a firm that are expected to roll over into Asset Based Financing cash in the future Syndicated Loans SNCs n A loan package extended to a