毕博上海银行咨询Final Deliverables SmBusLoanProcess.doc

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1、HANVIT BANKSMALL BUSINESSCOMMERCIAL LOANAPPROVAL PROCESS(Draft)11/10/99Prepared by KPMG, LLPTABLE OF CONTENTSCREDIT REVIEW AND LOAN APPROVAL FOR SMALL BUSINESS LOANS3Table 1 - Applicability of Retail Scorecard in Business Loan Decision by Total Loan Amounts3Table 2 - Credit Review Process4Table 3 -

2、Applicability of Retail Scorecard in Business Loan Decision by Borrowing Entity4LOAN DECISION PROCESS5STEPS IN CREDIT REVIEW FOR SMALL BUSINESS LOANS6Limits, Pricing, Rating9Note Concerning Loan Applications Not Processed in CRMS10APPENDIX A- USE OF RETAIL SCORECARD VS FINANCIAL ANALYSIS IN COMMERCI

3、AL LENDING12APPENDIX B- WHAT THE BANK SHOULD REVIEW14CREDIT REVIEW AND LOAN APPROVAL FOR SMALL BUSINESS LOANSFor purposes of this document, Small Business Loans will be defined as those whose total amount is within the Branch Managers or Relationship Managers lending limit as defined in the Hanvit B

4、ank credit and lending policy manuals. These loans may range from a few thousand Won to as much as 1.5 billion Won (approx. USD1.25 million) for a Class A Commercial Branch Manager.Because of this wide range of loan size, and the corresponding financial size of the businesses, it is difficult to out

5、line a single set of process steps for all such loans. For smaller loans, a simplified procedure will be outlined. For larger loans which begin to approach the W1.5 billion limit, the full CRMS credit analysis should be completed. It is not valid to make an excuse that the borrower does not have acc

6、urate financial information which could be used to justify larger loans. While a very small loan could be made based on personal financial information of the business owner, larger loans require financial analysis and the borrower should be required to fill out Hanvit Bank financial statement forms,

7、 if no formal financial information is available. NOTE: The financial statements should contain a statement to the fact that the financial information is being provided to the bank for the purpose of obtaining credit, that the information is true and correct to the best knowledge of the persons whos

8、e financial information is represented on the forms and must require signatures of all persons whose financial information is represented attesting to the truth of the information.Table 1 - Applicability of Retail Scorecard in Business Loan Decision by Total Loan Amounts:Applicability of Retail Scor

9、ecardTotal LoansBorrowerGuarantorLess than 50 MM WonAdequate if loan is to individual Proprietor - Not applicable for loans to partnerships or corporationsCan be used to assess Personal GuaranteeW 50MM to W 150MMAdequate for loans to individuals, but separate business financial data should be availa

10、bleNot applicable for loans to partnerships or corporationsCan be used to assess Personal GuaranteeW 150MM to W 250MMCan provide information on individuals, but separate business financial data should be availableNot applicable for loans to partnerships or corporationsCan be used to assess Personal

11、GuaranteeOver W 250MMNot applicable. Business financial statements from the borrowing entity should be obtained.Can be used to assess Personal GuaranteeTable 2 - Credit Review ProcessNew Loan ApplicationTotal LoansFinancial StatementsRun ScorecardRisk RatingCredit MemoLess than 50 MM WonNot required

12、YesLowest Pass GradeNoneW 50MM to W 150MMRecommended. Review based on results of scorecardYesLowest Pass GradeSummaryW 150MM to W 250MM Small business credit scoring in the U.S. has shown that for loans above USD100,000 (approx. W 120 million) the accuracy of scorecards prediction of business owner

13、behavior diminishes and more reliance is required on financial statements and business plans. “Impact on Small Business Scoring”, Meridien Research, April 1998.Required. Informal financial statement review or spreadsheet analysisYesLowest Pass GradeSummaryW 250MM W 500MMRequired. The U.S. Federal Re

14、serve Board cautions against the use of credit scoring techniques for loans or credits that are large or complex.Informal financial statement review or use of CRMS ModulesYes, for guaranteeLowest Pass GradeDetailedW 500MM W 1.0 bnRequired. Use CRMS ModulesYes, for guaranteeBRR from CRMS ModulesCRMS

15、ReportW 1.0 bn W 1.5 bnRequired. Use CRMS ModulesYes, for guaranteeBRR, FRR from CRMS ModulesCRMS ReportTable 3 - Applicability of Retail Scorecard in Business Loan Decision by Borrowing Entity: See Appendix A for additional information.Business Borrowing EntityUse of ScorecardUse of Business Financ

16、ial StatementsBasis for Loan DecisionIndividual (One person entity)Can be primary source of loan decision for small loans (See above).Use if available.Net income of the individual (from personal financial statements).Sole Proprietorship (Small Business with employees)Can be primary source of loan de

17、cision (See above). Strongly recommended.Net income of the business, (from personal or business financial statements).PartnershipTo value strength of guarantors. See discussion related to importance of obtaining personal guarantees.Required.Financial strength of the partnership business.SME Account

18、(Un-Audited)To value strength of guarantors.Required.Financial strength of the business entity.SME Account (Audited)To value strength of guarantors.Required.Financial strength of the business entity.Large Corporate AccountNot appropriateRequired.Financial strength of the business entity.LOAN DECISIO

19、N PROCESS:To facilitate simplification of the loan application analysis process, certain policy-based conditions should be set which will be the first gate through which the loan request will proceed. If the borrower fails to meet these conditions, the loan request should be rejected with no further

20、 review. For example, if a certain condition exists, such as a Red Condition the bank policy will dictate that the loan request will be rejected.The next steps will depend on the size of the loan and size of the borrower. The decision to make the loan is to be based principally on the cash flow of t

21、he business. The main question is whether the net cash flow of the business entity or the net income of the individual (after all business and/or household expenses) is sufficient to repay the loan.Cash flow analysis will require financial statements. Thus for all but the smallest loans (see table a

22、bove), financial statements should be obtained. These statements could be prepared by the borrowers accountant. If the borrower does not have an accountant, the bank should demand income tax returns from the borrower and the principal owners as will be described below. Alternatively, it has been rec

23、ommended that Hanvit Bank develop financial statement forms (balance sheet, income statement, cash flow statements) which can be given to the borrower to be filled out.NOTE: If the borrower will not provide financial information sufficient to show that the borrower personally or the business entity

24、has the ability to repay the loan, the loan should not be made.The review of the financial statements should look mostly at the cash flow as it relates to the loan request. Assets of the business which can be pledged, or guarantees of the principal owners of the corporation are only safeguards in th

25、e event of business failure. They should not be the primary criteria for approving the loan since without adequate cash flow, the loan would go into default immediately.Cash flow capability should be determined as follows: Determine the monthly cash flow of the business entity from the financial sta

26、tements or tax returns as appropriate. Determine the monthly loan payment required to repay the loan over the requested term. If the amount of the monthly cash flow in excess of the monthly loan repayment is not substantial, the loan should probably not be made under those terms. A smaller loan, or

27、extended repayment term may be required for the borrower to qualify for the loan. STEPS IN CREDIT REVIEW FOR SMALL BUSINESS LOANS:The following sections set out some steps for loan decision making and processing. The goal is to provide an efficient, cost effective decision process while maintaining

28、the highest possible accuracy of the decision to avoid loan losses. Answers to these questions will guide the Relationship Manager (RM) to ask for the proper information to allow the RM to make an informed decision on the loan request.The RM should utilize the Hanvit Bank loan application forms for

29、all information related to the loan.The Borrowers Business: What is the name of the Business? Is the Business,- An individual business person (Proprietorship)?- Is it a separate legal entity?Y/N- What kind of legal entity?Partnership? Corporation?Proprietorship: If the borrower is operating the busi

30、ness as a sole proprietorship, the borrower will own any business assets as well as the borrowers personal assets in the his/her own name. If this is the case, the bank should get financial statements from the borrower listing all business and personal assets. The bank should also get the last three

31、 (3) years income tax returns which should show the business income and any other personal income (such as from a spouse). If the borrower and the spouse file separate income tax returns, the bank should get the last 3 income tax returns from each person. This is required to get as accurate a look a

32、s possible into the amount of income the borrower actually has.This income should be compared against the business and household expenses of the borrower and spouse to determine the amount of money the borrower has remaining to be used for loan payments. Partnership or Corporation:If the business is

33、 a partnership or corporation, it will have separate financial statements from the personal financial statements of the principals of the business who are requesting financing. In this case, at least three years financial statements should be obtained for the business. An analysis of the business fi

34、nancial statements will determine the size and financial strength of the business. For underlimit loans it is likely that the business is small and that there will be a need to have the loans to the business guaranteed by the principal owners of the business (partners or shareholders). If this is th

35、e case, it is required that the bank get the personal income tax returns of all such owners as well as their own personal balance sheet (a listing of assets and liabilities). To whom is the loan being made?Loans should generally be made to the entity which owns the business assets. For small busines

36、s loans, it is advisable to have all assets of the business pledged to the bank as collateral for the loans. If the borrower requests that the loan is to be made to the borrower personally for investment in the business, or to another entity special caution is required. In all cases, the financial s

37、tatements of any party to the loan transaction, the borrower, guarantor, entity pledging collateral, etc. must be obtained and reviewed.What is the Loan Request? How much money is being requested for the Loan? For how long will the money be needed? For what purpose will the money be used? NOTE: If t

38、he loan is to purchase business assets, all assets should be taken as collateral How will the loan be repaid?- From personal earnings of the business person?- From net profits from the business? Over what time period (months or years) will the loan be repaid? What payments will be made?- Principal a

39、nd Interest?How Much per Payment?- Interest Only?CAUTION: It should be specifically documented why principal is not also being paid on a regular basis. Interest only loans can easily lead to complacency on the part of the borrower and lack of financial discipline. This can lead to large losses when

40、the principal amount is later required to be repaid and the borrower has not set aside enough money to repay the principal.Collateral and Guarantees What collateral is being pledged to secure the loan? Who will guarantee U.S. studies have shown that 40% of businesses fail within the first 2 years of

41、 operations and 80% within 10 years. These studies also show that the stronger the personal guarantee, the less likely the business is to fail. the loan?Personal guarantees should be obtained from the owners of the business, partners, or major shareholders of corporations. In all cases where guarant

42、ees are taken, the guarantee must be given by the principals and their spouses.Financial Information RequiredGenerally the bank should obtain the following information: Personal credit information about the guarantorstypically principals and their spouses Select financial data from borrowers (or gua

43、rantors) personal financial statements (e.g., net worth, total assets). Information about any major personal assets offered as collateral such as real estate or other principal assets should be verified by a check of public records of ownership. Company income sheet and tax information (three to fiv

44、e years) Company balance sheets (three to five years) Company cash flow statements (three to five years) Additional information related to the loan requestSpecifically for small business loans the following financial information should be obtained: For Individual Borrower get:- Last 3 years business

45、 financial statements and/or- Last 3 years business and/or personal income tax returns, and- Personal Balance Sheet (Assets & Liabilities). For Partnership or Corporate Borrower get:- If formal Financial statements, get: Last 3 years financial statements Last 3 years income tax returns for principal

46、s and their spouses who will guarantee the loan, Personal Balance Sheet (Assets & Liabilities) of the principals and their spouses who will guarantee the loan.- If No formal Financial Statements are available, get Get last 3 years business income tax returns Business Balance Sheet and Income Stateme

47、nt on Hanvit Bank Forms Last 3 years income tax returns for principals and their spouses who will guarantee the loan, Personal Balance Sheet (Assets & Liabilities) of the principals and their spouses who will guarantee the loan. Last 3 years business and/or personal income tax returns, andProcessing Steps should follow the Hanvit Bank process with two differences. First, the scorecard should be used to get a report of the credit worthiness of the individual. The financial statement analysis should be done in the most efficient manner possible relative to the size of the loan.