Chapter 1 - Introduction

Credit Analysis and Lending Management Dương Tấn Khoa
Credit Analysis and

Lending Management
ThS. Dương Tấn Khoa
School of Banking - UEH 1

Course descriptions:
 This subject offers insight theories and practice into the
credit analysis and lending business at commercial
banks
 Students will be equipped with specialized knowledge
related to lending activities such as: the lending
process, financial statement analysis, working capital
financing, project financing, collateral analysis and
valuation....
 Graduated students will be able to develop their
careers in investment banks, funds, asset management
companies, securities firms, commercial banks.

Course objectives:
 Understanding the nature of lending business in
commercial banks.
 Being able to understand and provide credit products
 Being able to analyze and suggest credit decisions.
 Apply critical thinking, problem solving and
presentation skills to individual and/or group activities
dealing with investment banking.

Course assessment methods:

Mid-term test: 50%, opened test:
Test 1: 30%
Group Assignment: 10%
Attend class: 10%
Final test: 50%, opened test

• Textbooks:
– Credit analysis and lending management / Milind
Sathye, James Bartle, Ray Boffey, 3rd edition

About the lecturer
 Full name: DƯƠNG TẤN KHOA
 Mobile number: 0909.243.600
 Email: [email protected]
 Qualifications:
• Master of Commerce –
Finance (Honors) – The
University of Melbourne –
Australia.
• BA of Finance and Banking –
UEH (Honors)
 Current position
• Vice Dean of School of
Banking - UEH
• Manager of Investment Bank
program - UEH
6
Chapter 1:
The Principles of Credit

Business
ThS. Dương Tấn Khoa

Credit business
Constitutes one of the most important functions
of any bank
Around 70% of bank’s assets are invested in
loans and advances.
If the lending function is not well managed, it
could threaten the existence of the bank
Due to the credit quality problems
To mitigate the credit quality problems,
adequately trained staff are required

Credit business (cont.)

Credit includes a wide range of products:
Lending (the most common product in Vietnamese
banking system)
Discounting
Factoring
Overdraft
Bank Guarantee
Credit card
Leasing
Other types of credit activitives

Why do we need to do credit analysis (or

Due diligence)?
Can you – as a credit officer – trust your
customer?
The customer has more information related to
her ability and willingness to repay the loan
The bank must do due diligence to fully evaluate
its customer before making any credit decisions

What is credit analysis (or Due diligence)?

❖Due diligence is an investigation, audit, or
review performed to confirm facts or details of a
matter under consideration.
❖Due diligence requires an examination of
financial records before the bank make credit
decision.

The two important rules in lending

The customers MUST use fund to the promised
purpose specified in the loan contract
Repay the loan on time

 The principles of good lending

 Safety the loan
 Suitability of loan purpose
 Profitability


 Safety the loan
 Only grant loan to borrower who is considered safe
 A safe borrower:
• Good character
• Financially sound
• Has ability and willingness to repay the loan
• Has adequate collateral or insurance (as a back-up plan
when things go wrong!)
 Assumptions made when the loan is made go wrong
 Circumstances change so dramatically


 Suitability of loan purpose
 Only give the loan to valid purposes
 A valid purpose is one that is legal and conforms to
the lending policy of the bank


 Profitability
 Banks lend money to customers to earn profits
 Banks must compare the cost and benefit of a loan
before granting it
 Banks must carefully weigh the risks and return from
a possible loan

In summary, safety, suitability and profitability

are three basic principles of prudent lending.
THE BANK UNDERTAKE CREDIT
ANALYSIS OF ALL LOAN PROPOSALS

 Traditional methods of credit analysis

 The purpose of credit assessment (or credit
analysis or due diligence) is to measure credit
risk
 Criteria to do credit analysis: 5C model
 Character
 Capacity
 Capital
 Collateral
 Conditions

 Character:
 Most important criteria
 Most difficult to assess
 It is about TRUST
 Trust is like glass. Once it is broken, it cannot be
repaired. Even if repaired, the marks of such repair are
always present.
 The concepts of character differ from countries to
countries, form cultures to cultures
 Character assessment involves collecting information
about the borrower’s track record of integrity,
repayment ability, spending habits,…

 Capacity:
 The ability to repay the loan together with interest
follow with the predetermined schedule
 Capacity refers to financial capacity to repay the loan
 To assess capacity, we need to answer two main
questions:
 Is the borrower financial position is sound?
 Will the borrower generate sufficient income to
service the repayment of the loan?

 Capital
 Refers to the capital contribution that the borrower
proposes to make in the total investment
 EX: Common rule is 70%-30% (the bank only lend
70% of the total investment)
 The greater the capital, the greater is the
owner’s confidence in the project
  the lender will feels confident about lending the
project
 Lending against the strength of the security OR
lending against cash flow?

 Collateral
 Also known as the secondary source of repayment
 When the loan cannot be paid, the lenders usually sell
the collateral and use the proceeds to set off the
outstanding loan amount
 Neve forget: Taking possession of the collateral or
selling the collateral is a long and expensive legal
process

 Conditon
 An analysis of conditions covers external, internal
factors
 External factors:
 Condition of the economy
 Condition of relevant industries
 International events
 The threat of war,…
 Internal factors:
 Lending policy
 The lending budget
 Expert staff to monitor the loan

 Sources of information for credit

analysis
 Data collect from the borrower’s submitted
document
 Data stored in the bank
 Interview the borrower
 Data from thord-party

 The lending process
Collect Make
Credit
required decision
Analysis
document
Collect Disburse
Monitor
repayment

Thank You!!!

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Credit Analysis and Lending Management Dương Tấn Khoa

Credit Analysis and

ThS. Dương Tấn Khoa

School of Banking - UEH 1

School of Banking - UEH 2

School of Banking - UEH 3

Course assessment methods:

School of Banking - UEH 4

School of Banking - UEH 5

The Principles of Credit

ThS. Dương Tấn Khoa

School of Banking - UEH 7

School of Banking - UEH 8

Credit business (cont.)

School of Banking - UEH 9

Why do we need to do credit analysis (or

School of Banking - UEH 10

What is credit analysis (or Due diligence)?

School of Banking - UEH 11

The two important rules in lending

School of Banking - UEH 12

 The principles of good lending

School of Banking - UEH 13

 The principles of good lending

School of Banking - UEH 14

 The principles of good lending

School of Banking - UEH 15

 The principles of good lending

School of Banking - UEH 16

In summary, safety, suitability and profitability

School of Banking - UEH 17

 Traditional methods of credit analysis

School of Banking - UEH 18

School of Banking - UEH 19

School of Banking - UEH 20

School of Banking - UEH 21

School of Banking - UEH 22

School of Banking - UEH 23

 Sources of information for credit

School of Banking - UEH 24

 The lending process

School of Banking - UEH 25

School of Banking - UEH 26

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