Knowing the customer Find out as much as you can about the company and its industry prior to meeting with the customerE.g Unlimited Airway is a European airline providing air transport services to travelling passengers and/or freight.
Ask questions about the company’s products and services, customers, suppliers, facilities, management, ownership, and history.E.g Provides intercontinental, intra-continental, domestic, regional and international flight services all year round. Develop your initial observations about management’s behavior and Start to evaluate management’s qualifications and abilities to carry out the company’s business strategy.Investigating competition, market share, and the probable impact of economic conditions on the business.E.g Other airline companies Identify the company’s business strategy and see if it is adequateAnalyzing non-financial risksOperational Risk(eg.
fraud, pilot or crew misconduct, failure of internal controls or audit systems, natural disasters like blizzards which would affect airplanes)Legal risk (counterparty does not honor a contract)Key Man risk(a firm’s most important asset is its people. Conversely, however, this means that they are also a firm’s biggest liability, particularly when they leave.) E.g if an airlines’ pilots leave.Management competencyBefore beginning any financial analysis, Analyze the competency and reputation of the firm or individual preparing your customer’s financial reports.Reviewing the auditor’s Engagement Letter, Financial Statements, and Management Letter, as well as accounting fundamentals and generally accepted auditing principles (GAAP).Understanding the numbers probing into how and why the loan request originated.
Basically find out the nature of the loan request.Analyze the balance sheet,list of assets and liabilities, revenues and costs and etc. Basically analyze the company’s financial statements and provide an overview.
Once bank has identified the underlying borrowing cause(s) and understand both primary and secondary repayment sources available they can proceed to:Structuring the dealstructure of the deal appropriately establishes your customer’s expectations for how your institution will perform during the term of the relationship.if they operate in accordance with the terms and conditions of the loan agreement, your customer can expect funding from your institution.By having an appropriate structure to the relationship, agreeable to both parties, bank has established a mechanism for monitoring individual transactions within the relationship.Have a loan covenant checklist that routinely tracks your customer’s adherence to covenants.Require that an officer of the company regularly (quarterly, for example) certify as to the company’s compliance with all of its outstanding agreements.Pricing the deal Determining the appropriate pricing is a critical credit risk management technique.ensures that your financial institution will be adequately compensated for the risk of the deal.factors that affect pricing include the following:Marketplace in which the bank operates.General economic conditions.