One of the most serious problems faced by commercial banks is the risk of non-payment of loans. Naturally, banks seek to minimize this risk through various ways of securing the repayment of bank loans. Collateral is the type and form of guaranteed obligations of the borrower to the lender (bank) to repay the loan in case of possible non-payment by the borrower.
According to bankers, it is necessary to have three "safety belts" to protect the lender from the borrower's failure to repay the loan agreement.
"The first belt is cash flow, and income is the main source of repayment by the borrower."
"The second belt is the assets offered by the borrower as security for repayment of the loan."
The "Third Belt" relates to the guarantees that legal persons provide as security for the loan.
The Civil Code of the Russian Federation provides that the performance of the main obligation may be supported by such means of security as a pledge, forfeit, bank guarantee, surety, deposit, as well as other ways provided by law and the contract.
Each of these methods has the purpose of forcing the borrower to fulfill his credit obligations.
Solvency of the enterprise is an opportunity and ability to timely repay all kinds of obligations and debts.
Creditworthiness is an enterprise's ability to repay only credit debts.
Therefore, the process of bank crediting can be divided into several stages, each of which specifies the characteristics of the loan, the ways of its issuance, use and repayment, the study of the client's creditworthiness:
1. consideration of the loan application and interview with the borrower;
2. studying the creditworthiness of the client;
3. preparation and conclusion of a loan agreement.
In reputable banks the loan application is considered as a part of the package of accompanying documents, including..:
1. notarized copies of the constituent documents of the borrower's company;
2. financial report including the balance sheet of the company and its annexes for the last three years.
3. cash flow statement. It is based on the comparison of the company's balance sheets for the two reporting periods and allows to determine the changes in various items and the movement of funds. The report gives a complete picture of the use of the deficit of resources, the time of release of funds and the formation of a deficit of cash receipts, etc.
4. internal financial reports, which describe in more detail the financial position of the company, the change in its resource needs during the year, quarterly or monthly.
5. internal operational accounting data related to current operations and sales, inventory value.
6. financing forecast, which contains estimates of future sales, expenses, production costs, accounts receivable, inventory turnover, cash requirements, capital investments, etc.
7. business plan, many loan applications are related to financing of start-up companies that do not yet have financial statements and other documentation. In this case, the enterprise-borrower provides the bank with a detailed business plan, which should contain information on the objectives of the project and methods of its implementation.
8. a loan application containing the basic information about the loan requested, the purposes for which it is intended, the amount, maturity, and the proposed collateral;
The purposes and objectives of the creditworthiness analysis are to determine the borrower's ability to repay the loan in a timely manner and in full, the degree of risk that the bank is willing to assume, and the size of the loan that may be granted in the circumstances and conditions of its granting. All this makes it necessary for the bank to assess not only the solvency of the client on a certain date, but also the forecast of its stability in the future. Objective assessment of financial stability of the borrower, consideration of possible risks on credit operations allow the bank to effectively manage credit resources and make a profit.
These concepts united in the CAMPARI system represent a set of assessment parameters that help to compare many facts related to the identification of potential risk of a particular loan.
The result of all the work done by the credit department is the preparation of the "Credit Officer's Conclusion on the application", which has the following sections:
1. the legal form of the applicant;
2. Name of the bank where the borrower's current account is opened;
3. the presence of debt on loans;
4. Financial condition of the applicant: liquidity ratio, intermediate coverage ratio, coverage ratio, independence ratio, creditworthiness class, sales volume, profit volume, assets volume, overdue payments volume.
5. Receipt of funds to the current account;
6. Assessment of management and accounting status;
7. Compliance of the loan's target orientation with the priorities of the bank's credit policy;
8. Proposal of reasonable ways to ensure the repayment of the loan;
9. Draft decision.