RAPPORT BANGLADESH LTD
Dhaka-Bangladesh
Event
Training Program
Title of Paper
CORPORATE LENDING RISK ANALYSIS
Presentation by
Prof. Dr. Khawaja Amjad Saeed
Professor Emeritus & Founder Principal, Hailey College of Banking & Finance, University of the Punjab, Lahore
Pakistan (2003----), Member Governing Council, International Federation of Accountants (IFAC), New York (19972000), President, South Asian Federation of Accountants (SAFA) (1997), President, Institute of Cost and Management
Accountants of Pakistan (1997-2000), President, Association of Management Development Institutions of South Asia
(AMDISA) (1993-96), Pro Vice-Chancellor University of the Punjab, Lahore (1994-1996), Founder Director, Institute of
Business Administration (IBA), University of the Punjab, Lahore (1973-1996) and senior faculty member of Hailey
College of Commerce, University of the Punjab(1965-73) & Senior Faculty members, Hailey College of Commerce,
University of the Punjab, Lahore (1965-73)
Venue & Date
Dhaka, March 10, 2012
1
PRESENTATION FRAME
Section A:
1. Risk:




Concept
Characteristics
Categories
Types
2. Risk Management Model:

RMMM
3. Risk Assessment:


Environment Management Approach
Organizational Analysis
4. Risk Mitigation:




Characteristics of Successful Banks
Mission Statement
Market Research
Innovation
2
PRESENTATION FRAME
5. Seven Cs Analysis: Risk Evaluation
6. NIB: Lending Models in Pakistan
7. Projects Risks:



Risks
Safeguarding Against Project Cost Over Runs
Project Profile
Section B:
Workshop Exercise, Problem Solving Session and Case Analysis
1. Risk Assessment:

Sensitivity Analysis
2. Financial Analysis Exercise
3. Case Study
SECTION: A
A-1: RISK
Concept:
1. Loss of part or all of the actual.
2. Lower Yield on an investment than expected.
3. “While it is futile to try to eliminate risk and questionable to
try to misuse it; it is essential that the risks taken be the right
risks” (Peter Drucker).
Characteristics:
1. Uncertainly:
May or may not happen.
2. Loss: If the risk becomes a reality, losses will occur.
4
A-1: RISK
Categories
1. Known:
2. Predictable:
3. Unpredictable:
Can be uncovered after:
a. Careful evaluation of the project plan.
b. Reliable information sources:
• Lack of documented requirements.
• Unrealistic project plans.
Extrapolated from past project experience .
Can occur but are difficult to identify in
advance.
5
A-1: RISK
Types
- Specific
- Project Risks:
- Budget
- Schedules
- Personnel
- Resource
- Customers
- Technical Risks:
- Design
- Implementation
- Verification
- Maintenance
- Market Risk
- Management Risk
6
A-2: RISK MANAGEMENT MODEL
RMMM
1.
2.
3.
Risk Mitigation
Risk Monitoring
Risk Management
7
A-3: RISK ASSESSMENT
ENVIRONMENT
A: Traditional
1.
Internal (4):
- Revenue
- Expenditure
- Finances
- Human Resources
2.
External (4):
- PEST
B: Current: Task Orientation
1.
Competition
2.
Customers
3.
Suppliers
4.
Distribution Channels
8
A-3: RISK ASSESSMENT
MANAGEMENT APPROACH
1. Management Controls
1.
Vision
2.
Mission
3.
Objectives
4.
Organization
2. Marketing
1.
Market Research (+Tools)
2.
Sales Trends
3.
Sales Promotion
4.
Sales Training
5.
Sales Controls
6.
Sales Force
7.
Competition
8.
Product (s)
9.
Pricing
10.
Distribution
9
A-3: RISK ASSESSMENT
MANAGEMENT APPROACH
3. Manufacturing
1.
Plant
2.
Equipment & Facilities
3.
Plant Operations
4. Production Planning
1.
Purchasing
2.
Material Controls
3.
Production Planning & Control
4.
Quality
5.
Cost Control
5. Industrial Relations
1 +PR
6. Legal
10
A-3: RISK ASSESSMENT
ORGANIZATIONAL ANALYSIS
Focus
1.
2.
3.
Aspects
1.
2.
3.
4.
5.
6.
7.
8.
Customers Performance People
-
Enthusiastic
Financial
Inspired
Foundation
Customer
Goals
Approach
-
Technology
Act
People
Lead
-
Strong
Special
Bold
Simplify, Simplify &
Simplify
Your Servant
Fast
Unleash the Power
With Care
11
A-4: RISK MITIGATION
CHARACTERTICS OF SUCCESSFUL BANKS
1. Culture
2. Values
3. Performance
4. Orientation
5. Products
6. Leadership
7. Recruitment
8. Investment
9. MIS
10. Credit Process
:
:
:
:
:
:
:
:
:
:
Open
Strong and Shared
Profit
Customers
Investment in New
Strong and Consistent
The Best Persons
In Training and Career Development
Operational
Strong and Balanced
12
A-4: RISK MITIGATION
MISSION STATEMENT
Clear and Concise Statement of:
1.
Who we are
2.
What we Produce/Serve
3.
Market we Serve
4.
Philosophical Concerns
5.
L.T Objectives
6.
Being:
Result Oriented
Specific
Attainable
13
A-4: RISK MITIGATION: MARKET RESEARCH
1. Total Market:
1.
Increase
2.
How Much:
- At home
- Abroad
2. Share of Market:
1.
Maintain
2.
Increase
3. Customers: Present & Potential:
1.
Continue to buy
2.
Who are they
3.
Where are they
4.
Who takes what
5.
Will they continue to need our products or service
6.
What do they use these for
7.
Competition
8.
Obsolescence
14
A-4: Risk Mitigation:
INNOVATION
1.
2.
3.
4.
Product
Process
Function
Inter-Departmental
15
A-5: SEVEN (7) Cs ANALYSIS:
1. One “C”
- Collateral
2. Three “Cs”
- Collateral
- Capacity
- Condition
3. Five “Cs”
1. 1-3 of 2 above
4. Capital
5. Character
4. Seven “Cs”
1. 1-5 of 3 above
6. Country Risk
7. Currency Risk
Risk Evaluation
16
A-6: NIB: LENDING MODES IN PAKISTAN
Focus
Modes
A: Lending (2)
1. Service Charge
2. Qarde Hasna
B: Trade Related (6)
1. Mark up
2. Purchase of movable or immovable
Property with buy back agreement or
otherwise
3. Purchase of trade bills
4. Hire purchase
5. Leasing
6. Development charges
C: Investment (4)
1.
2.
3.
Total 12 4.
Musharka or profit and loss sharing
Equity participation
PTC and Modarba Certificate Sharing
Rent Sharing
17
A-7: PROJECTS:
RISKS
I: Institutional Factors (10)
1.
Final Engineering
2.
Concluding Contracts with Consultants
3.
Acquiring Right of Way
4.
Utilities
5.
Procurement Speed of Equipment
6.
Funds diverted to other projects
7.
Management Consultant Problems
8.
Inadequate Supervision
9.
Shortage of Local Funds
18
A-7: PROJECTS:
RISKS
II: Technical Factors (7)
1.
Uncertainty of Original Engineering Estimates
2.
Conservative Engineering Estimates
3.
Unforeseen technical problems (Soil, slides,
water ----)
4.
Faulty Design
5.
Inefficient Contractors
6.
Disputes & Claims of contractors
7.
Change in Specifications (Additional work-----)
III: Economic & Political Factors (3)
1.
Change in Project Composition
2.
Price Increase
3.
Labour Shortages & Disputes
Total 20
19
A-7: PROJECT RISKS
SAFEGUARDING AGAINST PROJECT COST OVER RUNS
1.
2.
3.
4.
Consultants-Careful Selection
Consultants-Be Experts and Cost Estimators
Contingency Allowance-realistic Estimates
Reduce Contractors Fears (Risks) by Proper Explanations in
Bidding Documents
5. Supervision of Site-Sound
20
A-7: RISK MITIGATION:
PROJECT PROFILE
1. Name and Brief Description
2. Criteria
1.
Importance to economy
2.
Operationalability
3.
Viable Results
4.
Size
3. Promoters
1.
Names
2.
Addresses
3.
Financial Position
4. Investment
1.
Cost
2.
FX
21
A-7: RISK MITIGATION:
PROJECT PROFILE
5. Available Finances
1.
Amount
2.
Terms & Conditions
3.
Sources
6. Preliminary Assessment
1.
Executing Agency
2.
Inputs
3.
Water Supply
4.
Labour Situation
5.
Management
6.
Production Methods
22
A-7: RISK MITIGATION:
PROJECT PROFILE
7. Amount Needed
1.
Form
2.
Amount
3.
FX
4.
Timing of Utilization
8. Information
1.
Sources
9. Remarks
1.
Regional Head
2.
Aspects:
Financial Status
Technical Acumen
General Reputation of Applicant
Feasibility
Marketability of Products
23
SECTION B
B-1: RISK ASSESSMENT: SENSITIVITY ANALYSIS
Given Data:
Taka. 000
1. Estimated Investment (Taka)
1,000
2. Desired Rate of Return (%)
20
3. Estimated Units Contributing Normal Value (Number)500
4. Estimated Variable Cost (Taka)
1,000
5. Estimated Fixed Cost (Taka)
800
6. Estimated Revenue at Prevailing Price (Taka) 2,000
Required:
1. Visualize several, at least, three sensitivities.
2. Quantify the factors at (1) above.
3. Compute the impact of all the three sensitivity factors.
4. Offer your comments to assess operational risk.
24
B-2: FINANCIAL ANALYSIS EXERCISE
1. Nijat Hussain & Co. Ltd has approached you for financial
assistance.
2. Three years balance sheets and income statements figures
have been made available to you.
3. Required:
a. Undertake trend analysis of time series to develop a
perspective
b. Develop initial thoughts as to what financial policies the
company is following in respect of:
 Resource Mobilization
 Resource Utilization
 Protection of Financial Resources:
 Risks which the company is facing
 Financial Management Problems
25
 Distribution in Terms of Dividends
B-2: FINANCIAL ANALYSIS EXERCISE
5. Having built a perspective, undertake financial analysis
exercise by computing various ratios:
a. Liquidity
b. Solvency
c. Profitability
6. Prepare credit appraisal report.
Write up for discussion is enclosed.
26
B-3: CASE STUDY:
Bank’s Role: Managerial: Doubling the Profit
Jauhar Brothers, manufacturers of all metal garden and porch
furniture, presented their operating statement as of June 30,
2011 the result of six months operations.
Sales
TAKA
Taka
525,000
Cost of Goods Sold:
Variable Expenses:
Materials
52,500
Labour
70,750
Superintendence
21,000
Heat, Light, Power
5,250
Rs. 149,500
27
B-3: CASE STUDY:
Bank’s Role: Managerial: Doubling the Profit
Fixed Expenses:
Superintendence
9,000
Heat, Light, Power
3,000
Depreciation
Repairs to Building
Cost of Goods Sold
6,000
7,500
25,500
175,000
Gross Profit
350,000
Selling and Administrative Expenses:
Variable Expenses:
Commission
Advertising
105,000
5,250
110,250
Fixed Expenses:
Officers Salaries
30,000
Advertising
30,000
Office Salaries
Miscellaneous Expenses
Total Selling and Administrative Expenses
Net profit
72,000
30,000
162,000
Taka
272,250
77,750
B-3: CASE STUDY:
Bank’s Role: Managerial: Doubling the Profit
Based on discussions held, it transpired that the above
enterprise was operating at 60% of its installed capacity.
However based on marketing survey carried out, it was
concluded that the enterprise has good market potential
which could be tapped by increasing its capacity to 85%.
Accordingly the bank has been approached to finance the
expansion plan which will result in almost doubling the profit.
Required: The enterprise seeks your guidance in respect of
management decisions to be taken to meet the challenge to
raise the capacity from 60% to 85%. With ensequential
benefits.
Suggest a sound managerial plan to achieve the above goal so
that the bank can then guide the enterprise to achieve desired
results and also pave the way to finance expanding needs.
29
B-3: CASE STUDY
1. Guidelines for developing a managerial decision plan to raise
the capacity from 60% to 80% are suggested below:
1. Sales:
- Assume a constant price.
- Can suggest others also.
2. Labour:
- Suggest some percentage of sales: 15%.
- This will serve as motivational.
3. Superintendence:
- Variable: suggest some percentage: 3%.
- Fixed suggest some increase: Taka: 8,250.
4. Advertising:
- Present fixed and variable amounts are adequate for all
volume upto 60%.
30
- Variable rate may be 5% of such increase.
B-3: CASE STUDY
5. Others:
- All other variable rates will keep their same
relationship.
Required:
1. Compute the effect on:
a. Overall profitability results
b. Break even point
Hint
Formula:
FC
BEP=
---------------------VC
1- ----------TR
2. Also undertake stakeholders beneficial impact.
31
32