The Chartered Institute of Bankers (Gh)

Credit Origination,
Appraisal and
Disbursement
Carl J.E.T. Abruquah
Meridian Consults

Agenda

Introduction
Proposal
Canons of Good lending
Report Format
Approval
Term Sheet and Loan Agreement
Disbursement
Summary/Conclusion
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Introduction
Credit appraisal is a significant aspect of
the credit management process.
If a loan will go bad, it should be
established during the appraisal process
so that any loss is prevented.
A weak appraisal system will lead to a
deterioration in the Banks credit
portfolio
Banks therefore provide standards for
credit origination and appraisal
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Origination
The credit process commences when
a customer submits a proposal or
when a facility is due for renewal.
The Banks relationship arm may also
initiate proposals.
Referrals are a useful source of fresh
proposals.

Credit Origination Units

The credit origination units are normally
the business arms of the Bank.
These include:
Corporate
SME
Retail branches

Staff of these units have the duty of

compiling all the requisite information
about customer that is required to be
submitted to the approving authorities
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Appraisal
There should be a structured system
and format of appraisal.
Such a format will normally
incorporate what has become
established as the fundamental
principles of good lending or canons of
good lending.
Examples include CAMPARI and the
five Cs.
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CAMPARI

Character
Ability
Margin or Means
Purpose
Amount
Repayment
Insurance
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Character

Trustworthiness
Reliability
Background and experience
Track record
Personal behavior

Ability

Ability to manage financial affairs

Skill and experience of management
Balance of management skills
Commitment of managements
Experience in proposed area of
activity

Margin
Pricing of facility
Volume of work involved in
processing proposal
Riskiness of proposal
Margin above reference rate e.g base
rate

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Purpose

Acceptable
Working capital or long term capital?
Illegal
Industry concentration risks.
Bank policy.

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Amount
Should be sufficient for purpose
If more or less than amount required
may result in waste or inability to
undertake project.
Should match purpose
Have all expenses been taken into
consideration?
Customer contribution
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Repayment
Source of repayment should be made clear
at the outset.
When source is cash flow from operations,
should be supported by a cash flow
forecast.
The Bank may have to develop its own cash
flow in some circumstances.
The Bank should be satisfied that the funds
generated will be sufficient to cover
repayment of the facility.
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Insurance/Security

Appropriate
Readily realizable
Adequate
Should serve as safety net and not
basis of approval of facility.
Value should not be subject to wide
fluctuations and should not
deteriorate rapidly over time.
Ease of valuation
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Report Format
Report should incorporate above principles.
Staff should be given training regarding
preparation of report and issues to be
raised in report.
There should be no political influence on the
credit officer.
It is normally in a memorandum format with
a heading indicating e.g.

TO: CREDIT COMMITTEE

FROM: SME
NAME OF COMPANY:
DATE
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Report Format
THE REQUEST
Purpose, amount of credit, source of
repayment

Background of borrower
Credit assessment of the borrowers
products, industry and macro economic
factors.
Assessment of Management Profile
Key success factors or SWOT analysis
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Report Format
Financials

Historical Financial Analysis

Analysis of forecast
Analysis of repayment.
Account Profitability

Account operations
Track record/repayment history of borrower.
Overall risk assessment
Summary and recommendations.
PREPARED BY
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Areas of Appraisal
Business Risks
Industry characteristics
Competitive position of Product
Management

Financial Risks
Financial condition
Profitability
Capital structure
Present and future cash flows
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Evaluation Business Risks

Evaluation of Customers current strategy

Level of competition in the industry.
Customers market share
Position of product in life cycle
Relative attractiveness of customers
product
Qualification, age and experience of
management
Balance of skills of management
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Financial Evaluation

Profitability
Liquidity
Activity
Solvency
Cash flow coverage
Shareholder ratios

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Profitability
Return on Capital employed - defined as
the ratio of operating profits (Net Profit
before interest and taxes) to total capital
employed. This is normally defined as
shareholders funds plus long term loans
Return on equity net profit after taxes
divided by shareholders equity.
Gross Margin defined as gross profit
divided by sales
Operating Profit margin operating profit
divided by sales
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Liquidity
The cash cycle is calculated as the trade
cycle plus credit taken and given cycles
The trade cycle is calculated as
Raw material Inventory days in stock, plus
Production cycle,
Finished goods days in stock
The time to pay creditors is subtracted
The time for debtors to pay is added, giving
The cash cycle.

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Liquidity
The Cash cycle ratios are
Stock turnover stocks in hand divided by cost of
goods sold times 365 days
Creditors days trade creditors divided by
purchases times 365 days
Debtors days trade debtors divided by sales
times 365 days.

The liquidity ratios are

Current ratio - current assets divided by current
liabilities
Quick ratio current assets less stocks divided by
current liabilities.
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Solvency/Coverage
Leverage or gearing is calculated as
either prior charge capital divided by
equity or prior charge capital divided by
total capital (including long term loans)
Interest cover net profit before interest
and taxes divided by interest charges.
Debt ratio total creditors (both long
and short term) divided by Total Assets

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Stock Exchange Ratios

Dividend yield dividend per share
divided by market price of share.
EPS net profit per share divided by
total number of shares.
Earnings yield earnings per share
divided by market price per share.
Price earnings ratio Market Price
per share divided by earnings per
share, reciprocal of EPS
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Financial Projections

Financial projections should be realistic in relation to current

performance.
Most especially it should conform to industry growth rates
and current level of sales.
What is the limiting factor?
How will the company be affected by economic conditions
and cyclical trends?
Has the effects of inflation been considered in drawing up
the estimates
How will inflation and competition affect the pricing policy?
Does the budget reflect forecast demand of the business
and market at large?
Above all the projections should confirm customers ability
to repay the facility

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Account Operation
Are sales receipts fairly regular and at a constant
level or increasing level. Irregular receipts may
arise from seasonality of business, cash
transactions or diversion of funds into another
account with another Bank.
Supplier payments should be fairly regular and of
a constant or increasing level. Decreasing
payments may arise from decreasing profitability
or liquidity problems. Excessive increase may also
arise from overtrading.
Round sum payments mean the business is paying
on account and may be facing liquidity problems.
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Account Statistics
Average balances, lowest and highest balance
Does the account swing into credit, or is a hard core
developing? Is the hard core increasing in size?
Is there a deterioration of the average balance?
Largest debits and credits to the account
Number of transactions per month and average
monthly number
Excesses over anticipatory or agreed limits
Dormant borrowing perhaps customer has
abandoned the account and is operating with
another Bank
How does the debit turnover compare with sales?
Is the general pattern of the accounts changing?
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Approval
Approval levels
Decision
Approval
Decline
Restructuring of proposal

Clear audit trail

Arms length basis
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Disbursement
An advance should only be disbursed
after all documents have been
executed and the necessary terms
and conditions have been met.
Legal documentation e.g. relating to
securities must be reviewed ideally
by a specialized internal unit, before
any loan or credit facility is disbursed.
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Summary/Conclusion
Banks should have in place structured
procedures and formats for appraisal of
customer proposals.
This would go a long way to minimize the
significant risk involved in granting credit.
Banks have established canons or principles of
lending that should govern the granting of
credit.
Any format for internal credit reports should
incorporate these principles to ensure that a
proposal is properly appraised and the right
decision taken.
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THE END

THANK YOU
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