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A Banker’s Dilemma – How to Evaluate a Commercial and Industrial Loan Request?

CASELET, BANKING & FINANCIAL SERVICES
ET Cases, 4 Pages
AUTHOR(S) : Prof. D N Panigrahi, Associate Professor, Finance and Bank Management, Institute of Management Technology (IMT), Nagpur

Case Preview

A Banker’s Dilemma – How to Evaluate a Commercial and Industrial Loan Request?

 

Mr. Binay Mishra (Binay) aged 23 years, with an MBA from a reputed B-School in Nagpur was recently recruited by an aggressive new generation Private Sector Bank named India Trust Bank Ltd. Binay is very young, energetic and perseverant He was assigned at the Delhi branch as Trainee Loan Appraisal Manager/Credit Analyst in charge of the Small and Medium Enterprise (SME) segment and Mid-Corporate groups. Binay was expected to join his new job in about a couple of months or so. His job profile/key responsibility areas included: seeking/scouting for good borrowers from the SME segment, appraise the project/loan proposal, assess credit needs, prepare a full-fledged credit appraisal note and recommend with reasons/justifications to the sanctioning officer/his boss Mr. D.K.Nanda (Nanda) either for sanction of various credit facilities or for rejection of the loan request in each case. With a probation period of a year, Binay was to work under the direct supervision of Nanda. Job confirmation depended on successful completion of the probation period.............

Teaching Note Preview

A Banker’s Dilemma – How to Evaluate a Commercial and Industrial Loan Request?

 

Synopsis

This case study deals with the step-by-step procedure for processing the loan applications of a borrower. The objective of such a discussion is to provide a view of the various stages and steps of the process of loan appraisal of a commercial bank starting from the selection of borrower or borrower’s due diligence exercise. This case discussion gives a comprehensive picture of the lending function and credit management process. This case study will give the MBA students of “Commercial Bank Management (CBM)” class practical inputs on systematic and methodical approach to credit appraisal, analysis and credit management in respect of commercial and industrial loan requests. This case analysis will enable the students to gain the know-how of preparing a comprehensive loan appraisal note for the consideration of loan sanctioning authority of the bank. This discussion will give them industry relevant practical knowledge to make them job ready for the credit analyst/loan appraisal profiles of commercial banks and asset financing NBFCs.


The case study is narrated in the form of a story of a young professional recruited as a management trainee in the credit analyst profile of a new generation private bank in a metro city, just after passing from the campus. He is in a dilemma and lacks confidence in dealing with his new job profile. He meets his Professor of Bank Management and Banking Professionals in the ‘Banking Conclave’ held in the Institute’s campus and seeks their suggestions and advice on meeting his role expectations as a Bank Credit Analyst (Loan Appraisal Manager), more particularly, on credit analysis and evaluation of a commercial and industrial loan request.

Prerequisite Conceptual Understanding (PCU)

This case study pre-supposes an understanding of the core or primary activities of a bank comprising accepting deposits and making loans, different loan products and credit facilities, sound principles of bank lending, Know Your Customer (KYC) norms of banking, financial statements and ratio analysis from the prospective of a lending banker, etc.

  • • The students were asked to read the Sample Loan (Credit) Policy Document of a Commercial Bank provided by the course instructor. This will facilitate an effective class room discussion and interactive discourse leading to an appreciation of the methods and techniques of bank lending function and loan management.

 

Case Positioning and Setting

This case study is positioned for discussing the sequential steps in bank’s lending function covering the entire gamut from borrower’s selection to loan  appraisal to loan delivery, loan monitoring & supervision including NPA management and recovery. Ideally suited for “Bank’s Lending Function and Loan Management” chapter/ topic of “Commercial Bank Management (CBM)” course in MBA/PGDM, Executive MBA/PGDM, MBA (Banking) Programmes.

Assignment Questions

  • I. Draw a flow chart covering the sequential steps in the bank’s credit analysis and evaluation function covering selection of borrower to ensuring proper end use of bank loan.
  • II. Explain the importance of market intelligence in credit marketing and business development. Why selection of borrower or Borrower Due Diligence (BDD) is the most important task in the lending function of a bank? Explain the various techniques used in credit investigation and Borrower’s Due Diligence (BDD) process to ensure proper selection of borrower.
  • III. ...............
  • ....................................

 

Pedagogical Objectives

This case study will help students gain practical knowledge and experience on the nuances of credit appraisal and evaluation process of commercial banks and NBFCs, more particularly, commercial and industrial loan proposals. This case helps the instructors to deliver the topic of “Bank Credit Appraisal and Evaluation Process in case of Commercial and Industrial Loan Proposals” in an effective manner with a perfect blend of theoretical concepts and practical inputs. By analyzing this case, students will learn the followings:

  • • To understand and explain the different steps in the lending function of a bank
  • • To understand the Credit Marketing, Credit Investigation, Know Your Customer (KYC) or Borrower’s Due Diligence (BDD) process leading to proper Borrower Selection by banks
  • • To understand the techniques of bank Credit Analysis/Appraisal/Evaluation covering both financial and non-financial aspects to assess the financial requirements and repaying capacity
  • • To understand credit management and administration process covering loan documentation, disbursement, loan monitoring, follow up and supervision for ensuring proper end use of bank loan
  • ....................................................

 

$3.66
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Product code: BFS-2-0006, BFS-2-0006A

Abstract

This case study aims to illustrate the art and science of bank lending function which covers credit analysis, evaluation and management. Bank lending function is a process driven task with well-defined sequential steps. The steps are: understanding bank's loan/credit policy, business development/customer acquisition, obtain/receive formal loan application/proposal in bank's standard format along with the requisite documents, credit investigation/borrower selection/ customer due diligence, credit analysis/appraisal/evaluation and loan sanction or rejection, loan documentation, credit delivery & disbursement, credit administration, credit monitoring, follow up& supervision. This case study deals with the step-by-step procedure for loan appraisal: be it a personal loan or a home loan to an individual, a small ticket loan to a Micro Small and Medium Enterprise (MSME) or a big ticket Commercial or Industrial loan to a Large Enterprise. However, this case study mainly focuses on the credit analysis, evaluation and management of a commercial and industrial loan application. This is the science part of the bank's lending function. But lending is not fully a science, it is also an art. The tasks relating to borrower selection, credit marketing, customer relationship management, loan monitoring, managing non-performing loans and recovery management are also to some extent an art.



Pedagogical Objectives

  • To understand and explain the different steps in the lending function of the bank
  • To understand the Credit Marketing, Credit Investigation, Know Your Customer (KYC) or Borrower’s Due Diligence (BDD) process leading to proper Borrower Selection by banks
  • To understand the techniques of bank Credit Analysis/Appraisal/Evaluation covering both financial and non-financial aspects to assess the financial requirements and repaying capacity
  • To understand credit management and administration process covering loan documentation, disbursement, loan monitoring, follow up and supervision for ensuring proper end use of bank loan

Case Positioning and Setting
This case study is ideally suited for “Bank’s Lending Function and Loan Management” chapter/topic of “Commercial Bank Management (CBM)” course in MBA/PGDM, Executive MBA/PGDM, MBA (Banking) Programmes.



This Case Pack Includes:
- Abstract
- Caselet
- Teaching Note (**ONLY for Academicians)
$3.66
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