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Credit Management Concepts: Know Your Client

A cardinal rule in banking is the concept of “Know your client”. This means exactly what is says. The banker will do all he can to find out as much as he can about the company and the client. In this no information is too small or too immaterial since they will fit into a larger picture and the fate of the facilities extended may depend upon it. It has to be always remembered that the project may appear sound, the documentation perfect and the financials impeccable. However, if the intent is to cheat, it could cause severe losses to the Bank.… Read the rest

Abey Francis

Exchange Rate Factors – Factors Affecting Exchange Rates

When trade takes place between the residents of two countries, the two countries being a sovereign state have their own set of regulations and currency. The exporter would like to get the payment in the currency of his own country, the importer can pay only in the currency of the importers country. This creates a need for the conversion of the currency of importer’s into that of the exporter’s country. Foreign exchange is the mechanism by which the currency of one country is gets converted into the currency of another country. The conversion is done by banks and financial institutions, who deals with foreign exchange business.… Read the rest

Abey Francis

Influence of Interest Rate on Exchange Rates

Traditional macroeconomic exchange-rate models are based on fundamental analyses. In these models, the basic force that drives currency’s rate comes from the balance between supply and demand of currency, for example if the demand for the U.S. dollar exceeds its supply at the current exchange-rate against the euro the price of US dollar in terms of the euro will rise. Conversely, if supply exceeds demand, the price will fall. Demand and supply factors that govern currency’s rate’s become much more complex than that because people don’t use currencies just to purchase foreign goods and services, but also for activities like cross-border investment and speculation.… Read the rest

Abey Francis

Commercial Credit Analysis: Collateral

Collateral is the security given to the bank as a safeguard for the facility/ facilities advanced. This is effectively the Bank’s insurance that should there be a default, the bank has something to fall back on to either recover in part or full the amount advanced.

It is important for a prospective borrower to realize that there is no such thing as a standard collateral. The nature of the collateral, the amount and the percentage of the facility advanced that it covers will vary from borrower to borrower and from bank to bank.

However, there are some standard collaterals.… Read the rest

Abey Francis

Commercial Credit Analysis: Debt Covenants

Conditions imposed on facilities extended by banks, also known as covenants (here Debt Covenants) are imposed by bankers upon a borrower to:

  • Preserve the financial strength of the borrower.
  • Maintain the borrower’s ability to refinance itself – the borrower (being a limited company or a business) continuing as a going concern.
  • Control the assets – prevent the borrower from selling assets thereby ensuring that assets are not dissipated,
  • Ensure that the borrower does not do something that would be detrimental to the interests of the Bank.

Debt covenants, therefore, are from a banker’s perspective extremely important in  the structuring of a loan.While… Read the rest

Abey Francis

Commercial Credit Analysis: Sources of Repayment

The main concern that a banker has when facilities are extended is on the repayment of the monies advanced. This is the question that he will invariably zero in on and it would be prudent for the prospective borrower to advise him upfront on how he intends to repay the facility.

In ideal circumstances there should be more than one source of repayment so that should there be, for some reason, a delay or a problem, the repayment commitment can still be honored. Bankers too, if presented with a well structured plan/ plans of repayment would be more willing to listen and even advance facilities.… Read the rest

Abey Francis