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