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Administration of Loans

Chapter outline: Loan Covenants Red Flag/Warning signal Loan recovery Techniques

Terms & Conditions of Loan Approval


Terms & Condition of loan may vary from customer to another customer. In accordance with banks lending criteria & loan policy.

Seven important elements.

Loan Covenant
Written agreement or promise usually under seal between borrower and bank for the amount of the loan. Include terms & conditions of the loan, warranties, duties of each parties and certain control and restrictions on the borrower. Prepared by legal firm which are usually panel of the bank. Need to be stamped duty.

Loan Covenant
A loan covenant is a condition in a commercial loan or bond

issue that requires the borrower to fulfill certain conditions or


which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances

when other conditions are met.


Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called. Covenants may also be waived, either temporarily or permanently, usually at the sole discretion of the lender.

Purpose of Loan Covenant


Established legal relationship Prevent misunderstanding Certain control and restrictions Clarifies the responsibility of the borrower Give assurance to the borrower

Types of Covenants

FINANCIAL
COVENANTS NONFINANCIAL

Types of Covenants
Financial covenants
Refer to maintenance of specific ration

Common financial covenants used:


DEBT EQUITY RATIO, LOAN LIFE COVER RATIO etc

Types of Covenants
Non-financial covenants
Affirmative covenant
Clause that requires the borrower to perform certain action Ex: submission of periodical financial statement, maintain a minimum gearing ratio
Clause that restricts the borrower from doing certain things Ex: prohibition of mergers and acquisitions without bank approval. Clause that give the borrower information on certain things. Ex: action and penalties of default payment.

Negative covenant

Information covenant

Contents of Loan Agreement


Must contains the following:1. 2. Date of the agreement Name & address of the borrower and the bank.

3.
4. 5. 6. 7. 8. 9.

Purpose of the loan


Amount of the loan Period/duration of the loan Repayment method Rights of the bank to charge penalty on late payment Interest charge on the loan Types of security for the loan

10.

Other terms & conditions

Legal Aspect of Lending


Loan agreement represents legal relationship between borrower, bank and third parties if any. In case of default or NPL legal action can be taken against the borrower by the bank in accordance with

loan agreement.
Therefore, the loan agreement must be prepared diligently.

NON PERFORMING LOAN (NPL)


A loan classified as NPL when the principal or interest is due and unpaid for 3 months or more from the first day of default.

Legal Aspect of Loan Documentation


The following information must be observed:1. To use proper legal name of the borrower in loan documentation.

2. Ascertain the owner of the collateral. 3. Signature of the borrower & guarantor in loan document. 4. Complete & accurate collateral information. 5. Title search for loan secured by real property.

Legal Aspect of Loan Documentation


6. Adequate information & valuation of the collateral. 7. Insurance coverage. 8. Inform the guarantor of his duty as a guarantor. 9. Notified the guarantor on the status of the loan

10. Disburse the loan once the perfection of the loan has
been done.

Perfection of Securities
Land National code 1965 Section

Share
Debentures

Guarantees
Motor Vehicles

Identification of Problems (Warning Signal/Red Flag)


- Is the term used to describe the early symptoms or

warning signals of a loan prior to falling into repayment


default.

Identification of Problems (Warning Signal/Red Flag)


Financial warning signal.

Balance sheet
Income statement Bank account statement

Management warning signal.


management skills unable to cope with the environment changes Regularly changing position of BOD

Identification of Problems (Warning Signal/Red Flag)


Operational warning signal. Reducing profit and sales trend Changing demand and intensifying competition. General warning signal. More to natural disaster, can be combination of 3 signal Flood War, etc

Loan recovery Techniques


Stage 1 : Cooperative workout agreement Stage 2 : Collateral liquidation Stage 3 : Reducing debt to judgment

Stage 4 : Enforcement and collecting judgment


- Levi, garnishment, equity receivership & public sales. Stage 5 : Bankruptcy

Judgment Against Problematic Borrower


LEVY

An outright seizure of a borrowers property will be sold at a public auction. The proceeds are used to settle debt and other legal claims relating to the judgment.

The court may appoint a receiver to take control of the borrowers EQUITY RECEIVERSHIP assets and try to get as much cash as possible out of the business to repay the bank The bank would require a court order to instruct the third party withhold funds owed to debtor to forward the fund direct to the bank. When the market value of security charged is higher than the amount of debt owed the bank would apply for court order to sell the charged asset to the public. If borrower unable to pay the debt, court order on bankruptcy will be applied. Voluntary bankruptcy is when debtor voluntary files a position to relief from debt. While involuntary bankruptcy when the debtor forced into bankruptcy by his creditor.

GARNISHMENT

PUBLIC SALE

BANKRUPTCY