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1、Personal and Commercial Lending,Fang Ming（方明）02762681061,Teaching Contents,Personal and Commercial Lending:An IntroductionPersonal and Commercial Lending:Advanced,This Unit is designed to enable candidates to understand the principles and products that apply when lending to personal and commercial b
2、orrowers.It prepares the candidate for practical lending situations that would arise in the banking and related financial services industries and is relevant to candidates with no experience or to those who have a limited experience in lending.,Unit purpose,Assessment,It is preferred that this Unit
3、be assessed by an instrument of assessment that would require candidates to answer questions based on a case study relating to a personal and commercial lending situation.,Section 1,1 Importance of Lending practice Main source profit of financial institutions Risk of nonpayment Funds entrusted to a
4、financial institution by depositors-principal and agent relationship,moral hazard Responsibility to protect the investment of shareholders of financial institutions Legal implications,2 A systematic approach to lending 2.1Introduction stage Non-customers Existing customers,2.2 The application form2.
5、3 Reviewing the application CAMPARI CCCPARTS PARSERS 2.4Evaluation 2.5 Monitoring and Contol,Section 2,1 Principle of lending 1.1 Personal aspects character-integrity,honesty and reliability capital capability,1.2 Amount and purpose Fiscal or government directives,or strategic reason Personal custom
6、er-the ability to repay the loan Business customer-supporting evidence,1.3 Repayment Nature of the loan and interest 1.4 Safety short and medium-term personal borrowing is unsecured Main danger to the repayment by regular salary is redundancy and illness,1.5 Expediency Occasionally decisions on lend
7、ing are made that do not always follow an expected pattern 1.6 Remuneration Interest Commission 1.7Selling,2 Personal information relevant to personal lending,3.Importance of source and timing of income in relation to personal lending Salary Overtime payments,bonuses,commissions Timing of lending,Se
8、ction 3,Restrictions on lending Legal restrictions Credit rating restrictions The lenders policy,Additional Factors Relating to Personal lending lending to joint applicants lending to young persons lending to trustees lending to executors,5.3.3 Personal lending Sources 1 The provider,2 Methods of de
9、livery Direct sales Postal lending Electronic sale Regulatory aspects of loan sales,Section4,5.4.1 The products Short-term borrowing a.Overdraft features of overdrafts b.credit card features of,credit card,Medium-term borrowing Personal loans Secured personal loans Students Loans Graduates/Overdraft
10、s Career Development Loans Executor Loans,Section 5,5.5.1Long-term borrowing What is Mortgage?A mortgage is a loan you take out to buy property.Most banks and building societies offer mortgages,as well as specialist mortgage lending companies.If you change lenders but dont move home its referred to
11、as a remortgage.Concerned parties:Mortgagor Mortgagee,Repayment methods,The two main ways to repay your mortgage are repayment and interest only.With a repayment mortgage you make monthly repayments for an agreed period(the term)until youve paid back the loan and the interest.With an interest only m
12、ortgage you make monthly repayments for an agreed period but these will only cover the interest on your loan(endowment mortgages work in this way).Youll normally also have to pay into another savings or investment plan thatll hopefully pay off the loan at the end of the term.,Mortgage types Capital
13、and interest mortgages Interest-only repayment mortgages,5.5.2 Other loans Bridging loans,Section 6,5.6.1Interest rates Flat rates APR,Interest and Interest Rates,Some basic information on interest rates Bank of England base rateSet by Monetary Policy CommitteeProvides a basis for other ratesNo-one
14、can trade at a lower rate(arbitrage)Objectives of the MPCTo control the rate of inflation(target band)Increase in interest rate reduces demandReduction in interest rate stimulates demandBase decisions on economic data,Other Important Rates,LIBOR:London Interbank Offered RateThe rate at which banks a
15、re willing to lend to each otherThe basis for many financial calculationsMortgage ratesMortgages are the safest form of lending to individual so have lowest interest ratesMarket rate is determined by competition between lenders,Other Important Rates,Personal loansLoans for purchases other than prope
16、rty(more risk)Higher interest rate than mortgagesMore variation in interest rates than for mortgagesCollateralSecured loan:an asset is held as collateralUnsecured loan:no collateralInterest rate is lower on a secured loan,Interest Rate Calculations,To understand interest rates,need to go some throug
17、h some basic calculationsInterest is compounded at a specified intervalThe interval can make a differenceAssume interval is one yearThen borrowing 100 at a rate of 10%for one year implies a total repayment of,Compounding Interval,Now consider what happens if we compound interest more frequentlyIf ev
18、ery 6 months,then rate of 10%for a year becomes 5%for six months soIf compounded every 3 months The general formula for interest at rate r compounded m times a year for n years on a loan of L is,Continuous Interest,Continuous interest is the limit of more frequent compounding:,Effects,The difference
19、 between 110 and 110.52 may seem smallIt is equivalent to 0.52%on the annually-compounded interest rate of 10%On a large loan this could be significant effectCompounding periodMatters for repaymentNeeds to be clarified before alternative loans can be compared,Flat Rate Interest,Interest can also be
20、quoted as a flat rateConsider 100 borrowed for 5 years,with a flat rate of interest of 10%This means 10 of interest is paid per yearOver 5 years the total payments on the loan are 10+10+10+10+10+100=150The repayment structure is 5 payments of 30This is equivalent to an APR of 15.2%(see later or use
21、mortgage calculation),Annual Percentage Rate,These compounding issues motivate the need to find a standard of comparisonThe government has chosen to use the Annual Percentage Rate(APR)This interest rate converts any interest schedule(such as the flat rate)to the annual equivalentAnnual Percentage Ra
22、te,Annual Percentage Rate,Consider receiving m payments Ak at times tk and making n payments Ak at times tk The interest rate that makes the present discounted value of both flows equal solvesThe solution r to this equation is the APR,Example 1,Receive 100 at t1=0Pay 10 at t1=1,pay 110 at t2=2Soluti
23、on is r=10%This is just a standard loan at 10%interest,Example 2,Receive 100 at t1=0,receive 50 at t2=1.5Pay 90 at t1=1,pay 80 at t2=2Solution is r=13.5%How is this found?Draw a graphTrial and error,Example 2,Example 3,Flat rate interest of 10%100 is received at time 0Five payments of 30 are madeThe
24、 APR solvesThe solution is 15.2%as claimed earlier,Example 3,Comparison,The APR is quoted with all adverts for loansIt is a simple means of contrasting the rates on loans with different structures,5.6.2 Credit scoringScorecardsAdvantages of ScorecardsBehavioral scoring,5.6.3 The use of external cred
25、it reference,Section 7,The need for security,5.7.2 Types of security,5.7.3 security margin1.cash2.land3.securities4.life policies5.third security6.Security taken against an irrevocable mandate,Section 8,Protection products The need for protection 1.Loan repayment insurance 2.Life assurances 3.Buildi
26、ngs and contents insurance,Section 9,Commercial LendingLending to commercial customers take the same lending principles as personal lendingMore financial information before meetingCareful consideration of commercial lending,The business plan,Executive SummaryMarket AnalysisCompany DescriptionOrganiz
27、ation and ManagementMarketing and Sales StrategyServices and ProductsFunding(Financing)RequirementsFinancial InformationAppendices,Section 10,5.10.1Restrictions on Lending to BusinessesRestrictions on:The types of loans The types of customers BorrowerLegal Restrictions,5.10.2 Financial information I
28、t is to assess the true financial position,operating performance and cash flow.One important information source:Bank RecordsIncluding:Turnover(Revenue)Bank balancesStanding order and direct debitsDetails of unpaid itemsCharges,5.10.3 Business StructureSole trader(Single proprietorship)PartnershipLim
29、ited company,Section 11,5.11.1 The Management TeamThe success or failure of a business often comes down to the quality of the management team.So the strengths and weaknesses of the management team.,5.11.2 The Use of Annual AccountsThe chairmans statementThe directors reportThe profit and loss accoun
30、tA balance sheetThe cash flow statementAuditors reportNotes to the accountsA satement of total recognised gains and losses,Section 12,5.12.1 Management AccountsAlternative information source to the balance sheet and a profit and loss account.For management decision making and with no generally accep
31、ted principlesThe main emphasis of management accounts is in providing useful,timely,detailed and resonably accurate information for decision-makingTo take the individual parts or divisions of a business as objects rather than the whole business,5.12.2 Profit Budgets and Cash Flow ForecastsIt is an
32、estimate of the future profit returns from future trading.Cash flow forecast:future expenditure,income and shortfall financingIt is based on the short and longer-term objectives.,Elements of Financial Planning,Investment in new assets determined by capital budgeting decisionsDegree of financial leve
33、rage determined by capital structure decisionsCash paid to shareholders dividend policy decisionsLiquidity requirements determined by net working capital decisions,Role of Financial Planning,Examining interactions helps management see the interactions between decisionsExploring options gives managem
34、ent a systematic framework for exploring its opportunitiesAvoiding surprises helps management identify possible outcomes and plan accordinglyEnsuring Feasibility and Internal Consistency helps management determine if goals can be accomplished and if the various stated(and unstated)goals of the firm
35、are consistent with one another,Financial Planning Model Ingredients,Sales Forecast many cash flows depend directly on the level of sales(often estimated using a growth rate in sales)Pro Forma Statements setting up the plan as projected financial statements allows for consistency and ease of interpr
36、etationAsset Requirements how much additional fixed assets will be required to meet sales projectionsFinancial Requirements how much financing will we need to pay for the required assetsPlug Variable management decision about what type of financing will be used(makes the balance sheet balance)Econom
37、ic Assumptions explicit assumptions about the coming economic environment,Example:Historical Financial Statements,Example:Pro Forma Income Statement,Initial AssumptionsRevenues will grow at 15%(2000*1.15)All items are tied directly to sales and the current relationships are optimalConsequently,all o
38、ther items will also grow at 15%,Example:Pro Forma Balance Sheet,Case IDividends are the plug variable,so equity increases at 15%Dividends=460 NI 90 increase in equity=370Case IIDebt is the plug variable and no dividends are paidDebt=1,150(600+460)=90Repay 400 90=310 in debt,Percent of Sales Approac
39、h,Some items tend to vary directly with sales,while others do notIncome StatementCosts may vary directly with salesIf this is the case,then the profit margin is constantDividends are a management decision and generally do not vary directly with sales this affects the retained earnings that go on the
40、 balance sheetBalance SheetInitially assume that all assets,including fixed,vary directly with salesAccounts payable will also normally vary directly with salesNotes payable,long-term debt and equity generally do not because they depend on management decisions about capital structureThe change in th
41、e retained earnings portion of equity will come from the dividend decision,Example:Income Statement,Assume Sales grow at 10%,Dividend Payout Rate=50%,Example:Balance Sheet,Example:External Financing Needed,The firm needs to come up with an additional$200 in debt or equity to make the balance sheet b
42、alanceTA TL&OE=10,450 10,250=200Choose plug variableBorrow more short-term(Notes Payable)Borrow more long-term(LT Debt)Sell more common stock(CS&APIC)Decrease dividend payout,which increase Add.To RE,Example:Operating at Less than Full Capacity,Suppose that the company is currently operating at 80%c
43、apacity.Full Capacity sales=5000/.8=6,250Estimated sales=$5,500,so would still only be operating at 88%Therefore,no additional fixed assets would be required.Pro forma Total Assets=6,050+4,000=10,050Total Liabilities and Owners Equity=10,250Choose plug variableRepay some short-term debt(decrease Not
44、es Payable)Repay some long-term debt(decrease LT Debt)Buy back stock(decrease CS&APIC)Pay more in dividends(reduce Add.To RE)Increase cash account,Growth and External Financing,At low growth levels,internal financing(retained earnings)may exceed the required investment in assetsAs the growth rate in
45、creases,the internal financing will not be enough and the firm will have to go to the capital markets for moneyExamining the relationship between growth and external financing required is a useful tool in long-range planning,The Internal Growth Rate,The internal growth rate tells us how much the fir
46、m can grow assets using retained earnings as the only source of financing.,The Sustainable Growth Rate,The sustainable growth rate tells us how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio.,Determinants of Growth,Profit margin operatin
47、g efficiencyTotal asset turnover asset use efficiencyFinancial leverage choice of optimal debt ratioDividend policy choice of how much to pay to shareholders versus reinvesting in the firm,Section 13,5.13.1 Financial AppraisalThree main areas(limited in HND textbooks)Financial structureLiquidityProf
48、itability,Financial structure(Gearing),Assets(Capital that is injected into the business)=Equity+DebtThe relationship between equity and debt is important,which decides the borrowing potential and the ablity to repay the commercial loans.,Capital gearing ratio,Capital Gearing Ratio=Liability/Ownereq
49、uityAn investment ratio that compares the borrowing made by a company with the finance contributed by the shareholders.Capital gearing ratio is mainly used to analyze the capital structure of a company.The term capital structure refers to the relationship between the various long-term form of financ
50、ing such as debentures,preference and equity share capital including reserves and surpluses.Leverage of capital structure ratios are calculated to test the long-term financial position of a firm.,Capital gearing ratio is important to the company and the prospective investors.It must be carefully pla
