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Bank Lending


Sophisticated banking is vital for modern society to function and prosper. Banks lend to individuals and corporations but do so after carefully exploring the risks they undertake to each customer.

This book examines the important role of lending in banking operations and how banks can implement safe and effective loan initiatives. Banks rely on lending to generate profits, but it can be a risky venture. It is important for banking professionals to understand how to mitigate those risks.

Bank Lending from the Hong Kong Institute of Bankers discusses a variety of topics that impact a bank's loan strategy. This is an essential read for candidates studying for the HKIB Associateship Examination and those who want to acquire expert knowledge of Hong Kong's bank lending system.

Topics covered in this book include:

  • Assessing and reducing lending risk

  • Understanding the customer through financial statements

  • Using ratios to determine risk

  • Setting up an internal structure to reduce risk

  • Pricing and managing loans

Dah Sing Bank is delighted to sponsor this resourceful book. The Dah Sing Group is a leading financial services group in Hong Kong, active in providing banking, insurance, financial, and other related services in Hong Kong, Macau, and the People's Republic of China. The Dah Sing Group has gained a reputation as one of the most progressive and innovative financial services groups. Keys to its success are the strength of the Dah Sing management team and the group's commitment to serving its customers.

Preface ix


1 Lending to Personal Customers 3

Introduction 4

General Lending Principles 4

Types of Personal Customers 5

General Purposes of Personal Advances 6

Types of Lending to Individuals 7

Consumer Credit Data 22

Evaluating a Personal Advance Application 24

Summary 26

Key Terms 26

Study Guide 27

Further Reading 27

2 Lending Considerations for Corporate Customers 29

Introduction 30

The Balance Sheet 30

The Profit and Loss Account 37

The Cash Flow Statement 42

Cash Budget and Cash Flow Forecast 49

Reliability of Accounting Information by Source 50

Summary 55

Key Terms 55

Study Guide 56

Further Reading 56

Appendix 2.1: Comparing FIFO, LIFO, and AVR Inventory Methods 57

3 Financial Ratios and Operating Risks 61

Introduction 62

Techniques of Financial Analysis 62

Understanding Ratio Analysis 63

DuPont Analysis 80

Limitations of Financial Ratios 81

Operating Risks of the Borrower 82

Analysis Tools and Approaches 86

Summary 94

Key Terms 94

Study Guide 95

Further Reading 95


4 Credit Assessment 99

Introduction 100

Lending Principles 100

Credit Decision Tree 102

Credit Risk Rating 110

Summary 118

Key Terms 118

Study Guide 118

Further Reading 119

5 Structuring a Loan Facility 121

Introduction 122

Security in Bank Lending 122

Conditions and Covenants 132

Pricing a Loan Facility 134

Summary 140

Key Terms 141

Study Guide 142

Further Reading 142

Appendix 5.1: Sample Loan Agreement 142

Appendix 5.2: SME Funding Schemes 148

6 Meeting Business Needs 151

Introduction 152

Business Sectors in Hong Kong 152

Types of Credit 163

Trade Finance 169

Working Capital Management 180

Summary 186

Key Terms 186

Study Guide 187

Further Reading 187

7 Credit Control and Problem Loans 189

Introduction 190

Credit Management Process and Structure 190

Characteristics of a Sound Credit Monitoring System 196

Credit Risk Mitigation 197

Corporate Failure 198

Remedial Actions 202

Summary 206

Key Terms 206

Study Guide 206

Further Reading 207

Index 209