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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

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.

A-1: RISK

A-1: RISK

Types
- Specific
- Project Risks:
- Budget
- Schedules
- Personnel
- Resource
- Customers
- Technical Risks:
- Design
- Implementation
- Verification
- Maintenance
- Market Risk
- Management Risk

A-2: RISK MANAGEMENT MODEL


RMMM
1.
2.
3.

Risk Mitigation
Risk Monitoring
Risk Management

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

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

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

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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

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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

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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

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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

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A-4: Risk Mitigation:


INNOVATION

1.
2.
3.
4.

Product
Process
Function
Inter-Departmental

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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

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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. Musharka or profit and loss


sharing
2. Equity participation
Total 12 3. PTC and Modarba Certificate
Sharing
4. Rent Sharing
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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

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A-7: PROJECTS:
II: Technical
1.
2.
3.

RISKS

Factors (7)
Uncertainty of Original Engineering Estimates
Conservative Engineering Estimates
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
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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

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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

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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
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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

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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.
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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
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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.

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B-3: CASE STUDY:


Banks 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.
TAKA

Sales

Taka
525,000

Cost of Goods Sold:


Variable Expenses:
Materials

52,500

Labour

70,750

Superintendence
Heat, Light, Power

21,000
5,250

Rs. 149,500

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B-3: CASE STUDY:


Banks Role: Managerial: Doubling the Profit

Fixed Expenses:
Superintendence

9,000

Heat, Light, Power

3,000

Depreciation

6,000

Repairs to Building
Cost of Goods Sold
Gross Profit

7,500

25,500
175,000
350,000

Selling and Administrative Expenses:


Variable Expenses:
Commission

105,000

Advertising

5,250
110,250

Fixed Expenses:
Officers Salaries
Advertising

30,000

Office Salaries

72,000

Miscellaneous Expenses
Total Selling and Administrative Expenses
Net profit

30,000

30,000

162,000
272,250
Taka

77,750

B-3: CASE STUDY:


Banks 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.
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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%.
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- Variable rate may be 5% of such increase.

B-3: CASE STUDY

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