Lending: Products, Operations and Risk Management

Description/Objective:
The course aims to provide insights into the nature of lending products, the related operations and the role
of risk management in maintaining a healthy lending portfolio. Information about the prevailing mark up
rates, their structures and the impact they have on income recognition is made part of the syllabus. This
course also introduces the various types of financing facilities available in the local as well as the global
market. Furthermore, the course gives an insight about the risk management concepts along with basic
knowledge of fraud and how to assess lending risk and risk appetite.

Learning Objectives/Outcomes:
After the successful completion of this course, participants will have:
Knowledge and understanding of:
o Types and structures of financing facilities available in the market
o Various kinds of ownership structures
o Importance of evaluating customers business nature, size, and inherent risks
o The concepts of re-scheduling and re-structuring of borrower accounts
o Account, asset and collateral monitoring, systems and post disbursal processes
o Types and sources of risks in financing operations
o Identification, types and legal handling of fraudulent cases

Have clear understanding and functional knowledge of:

o The markup rates, KIBOR, SBP discount rate and PIB rates
o The different approaches to the markup rate structuring process
o Methods and frequency of mark up recovery and impact on income recognition
o Concept of banking spread and debt to liquidity ratio
o Financial Risk Assessment, risk appetite and risk portfolio of the bank
o Assessing customer Integrity and capability via market sources
o Transactions to be financed , identification and capturing of repayment sources

Have understanding and knowledge of:

o Financial controls and supervisory regulations
o Regulations prescribing internal control measures for banks
o Loan Loss Provisioning
o Examining customers risk taking capacity salient aspects of financial statements like
authenticity and credibility of assets, demarcation of free and already pledged assets,
realizable value of reported free assets and nature of current and contingent liabilities.

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Course Topics:
1. Lending Products
a. Categories of borrowers
i. Corporate Borrowers
Type of products
o Short-term Lending- Working Capital Financing

Running Finance- Advanced Merchandise/Demand Finance

Receivable Financing- Factoring, Invoice Discounting

Inventory Financing

Trade Finance (L/c)
o Long-term Lending

Term Loan

Trade Finance (L/c)
Purpose of borrowing
o Working capital- financing of business cycle-receivables, inventory
o New ventures and business expansion
Classification
o Secured, unsecured/clean, asset-backed
o Funded and non-funded facilities/direct and contingent
o Size-Corporate, Commercial, SME
ii. Individuals/Consumers
Type of products
o Overdrafts, loans, revolving credit
o Credit Cards
o Leasing
o Mortgage
Purpose of borrowing
o Personal use- running finance
o Property
o Automobile
Classification
o Secured, unsecured/clean, asset-backed
b. Regulations and Practices
Relevant SBP laws for lending including: lending limits, exposure calculation, disclosure and
reporting requirements
Prevalent market practices and bank policies with respect to lending products
c. Pricing
i.
Calculation of pool rates and internal cost of funds
ii.
Structuring floating mark-up rates and their impact during change of interest rates
iii.
The basis for floating mark-up rates using:
Karachi Inter-bank Offer Rates (KIBOR),
SBP Discount Rate and
PIB Rates matching the facility tenor
iv.
Banks spread over cost of deposits relating to customer and transaction risks
v.
Methods and frequency of mark-up recovery and their impact on income recognition

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2. Lending Risk Assessment and Management

a. Overview
Fundamental concept of Risk Management
Risk and the economic environment
Corporate governance and organizational structure
External reporting
b. Sources of lending risk
Obligor Risk
Obligor Business and industry risk cycles, price trends of raw materials, price trends of
competition products
Transaction failure risk
Other risks political, economic, market, liquidity, foreign exchange, interest rate risk
c. Risk Assessment
Financial analysis
Market check
Market research
Compliance with regulation requirement
Customer Integrity and capability
d. Risk Management
Credit Policy
Delinquency portfolio trends and control measures
Collection and Recovery strategies and methods
e. Types of collateral
Stated and implied lien over customers assets
Hypothecation
Assignment of receivables
Pledge of paper securities
Pledge of goods
Mortgage of immovable assets

3. Documentation and Collateral

a. Different types of financing agreements
Project financing
Account receivable financing
Lease financing
b. Types of collateral documentation
Hypothecation agreement
Lien agreement
Pledge agreement
Standby letter of credit
c. Safe-keeping of borrower/customer documentation
In-house arrangements and its modus operandi
Ex-house arrangements and its modus operandi
Arrangements for storage of documents and the system for recording
Procedures to be followed for depositing and retrieving documents

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d. Banks risk under various types of collateral

e. Monitoring of charge/margin
Appointment and role of Muccudums
Obligations of the custodial services under the arrangement
Monitoring Guarantees- issuers status, guarantee validity, conditions for claims
Monitoring of Insurance Policies- issuers status, policy validity, conditions for claims
Monitoring of Immovable Assets
Monitoring of stock reports and valuation
Proper system and credible sources for monitoring prices of financed assets and collateral

4. Management of Credit
a. Facility account monitoring
Frequency of peak/low facility utilization, swing in account balances
Frequency of irregularities in facility accounts
Difficulties in operating within present limits
Meeting facility turnover requirement and quantum of business booked
b. Facility monitoring systems
Significance and use of reports on activity in facility account
Due date diaries for retrieval of due amounts or settlement of facilities

5. Past Due Accounts

a. Classification
Basis for classification/classification triggers
Action steps based on classification level
b. Past-due account management
Activating remedial action
Customer contact modes depending on severity of failure in meeting commitments
Determining net exposure and status of financed assets and collateral
Reporting defaults for in-house remedial action i.e. fulfillment of any inter-bank commitments
that cannot be met any longer from borrowers repayment
c. Rescheduling and restructuring of borrower accounts
d. Loan loss provisioning

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