Chapter 5(credit doc & administrations)

5.1 Understand terms and conditions of letter of offer, content of financing agreement and legal aspects of financing documentation 5.1.1 Letter of Offer
I. II. This is the first document that goes out from the bank to the customer by which the bank agrees to grant or make available to the customer the facility. The Letter of Offer is an offer from the bank to the customer. If the customer accepts the offer, then there is a contract (subject to any reservation or conditions imposed in the Letter of Offer). The Letter of Offer therefore must be carefully worded. All relevant terms and conditions should be inserted. The terms of the Letter of Offer must be included in the facility documents. Generally, they cannot be changed, e.g., the Sale Price in a BBA transaction must be the same in the Letter of Offer and the Asset Sale Agreement. There are two views on whether to annex the Letter of Offer to the Facility Documents or not: a) First view it is advisable in order to ensure that no terms are left out. b) Second view it is not advisable as there may be conflict between the two. Therefore, all the terms in the Letter of Offer should be included in the Facility Documents. The customary contents of the Letter of Offer are as follows: (a) offer; (b) the facility; (c) purpose of financing; (d) concept; (e) purchase price; (f) selling price; (g) profit margin; (h) tenure; (i) payment of selling price; (j) security; (k) Ibra; (l) compensation; (m) availability period; (n) disbursement; (o) documentation; (p) conditions precedent; (q) other terms and conditions; and (r) acceptance.

III. IV.

v.

5.1.2 Credit covenant

LOAN COVENANT is a legally enforceable promise or restriction in a mortgage or loan. For example, the borrower may covenant to keep the property in good repair and adequately insured against fire and other casualties. A breach of covenant in a mortgage usually creates a default, defined by the mortgage, and can be the basis for foreclosure.

5.1.3 Common items required in financing agreement content

Refer attachment

5.1.4 Legal aspects of financing documentation

Legal Aspects of Loan Documentation A loan agreement represents the banks legal relationship with the borrower and also with third parties involved in the loan. When a loan is classified as non performing loan (NPL), legal action will be taken against the borrower in accordance with the loan agreement and documentation made before disbursing the loan. Therefore in preparing loan documentation, a banker must take duty of care in preparing it because the borrowers attorney, other creditors, bankruptcy trustees and the borrowers guarantors can challenge it. If those mentioned can prove the deficiencies of a legal adequacy of the loan agreement, the bank may lose it right over the collateral and will be unable to collect its money from the borrowers or guarantors. In preparing the loan documentation the bank must observe the following aspects of legal aspects of loan documentations: 1. To use the proper legal name of the borrower exactly as it appears in the National Identity card in all loan documentation. For a corporation, the banker needs to verify the mane by obtaining a copy of its charter from the registrar of companies. For partnership, a partner agreement is required. 2. Ascertain that if the owner of the collateral is not the borrower himself that the owner must execute all security documentation. 3. Make sure that there are signatures of the borrowers and guarantors on the loan documentation. For a corporation, it must clearly indicate the number of signatories required and the capacity of the individuals signing the documentation.

4. To have a complete and accurate collateral description. For example, where land is given as collateral information such as location, size, owner and users of the land should be accurate. 5. Loans that are secured with real property, a banker must make a title search prior to file in the land office or other offices for a first priority position for the banks. 6. To have adequate information and valuation of the collateral charged to the bank. A banker need to inspect the collateral and is required to make formal appraisals regarding the liquidation values of the collateral. 7. To reduce default risk, a banker will require the borrower to buy insurance coverage for the loan and the bank shall be named as the beneficiary on the insurance policy. 8. The banker must inform the guarantor about his duty as a guarantor to the borrower. A banker must not misrepresent the financial strength of the borrower or the value the collateral to the guarantor. 9. The guarantor must notify about the status of the loan especially where a problem might arise from the loan.

10. Before making payment for the loan the banker must make sure that perfection
of security interests is done and having the bank as the first priority.

5.2 Types of documentation for perfecting various securities.

5.2.1 Procedures how land title is charged to bank as security. (use chapter 4 note) 5.2.2 Procedures on motor vehicles as security for banks.

the goods will be auctioned and the cost of for auctioned will be bear by hirer. This situation also same as banks make motor vehicles as security of loan
5.2.3 Procedures in documenting debentures. (use chapter 4 note) 5.2.4 Procedures in perfecting guarantees as security. (use chapter 4 note) 5.2.5 Perfection of shares as security is made. (use chapter 4 note)

5.3 Various credit control procedures 5.3.1 Techniques in credit control procedures.
1. Quantitative or General Methods: The methods used by the central bank to influence the total volume of credit in the banking system, without any regard for the use to which it is put, are called quantitative or general methods of credit control. These methods regulate the lending ability of the financial sector of the whole economy and do not discriminate among the various sectors of the economy. The important quantitative methods of credit control are: (a) bank rate, (b) open market operations, and (c) cash-reserve ratio. 2. Qualitative or Selective Methods: The methods used by the central bank to regulate the flows of credit into particular directions of the economy are called qualitative or selective methods of credit control. Unlike the quantitative methods, which affect the total volume of credit, the qualitative methods affect the types of credit extended by the commercial banks; they affect the composition rather than the size of credit in the economy. The important qualitative or selective methods of credit control are; (a) marginal require ments, (b) regulation of consumer credit, (c) control through directives, (d) credit rationing, (e) moral suasion and publicity, and (f) direct action.

5.3.2 Types of credit grading systems.

5.3.3 Process in financing reviews

Stage 1 - The borrowers initial interaction with the bank
1. The borrower should write to the bank and outline their grievance(s) and ask that their credit application be reviewed in the banks internal appeals process. A written response to this appeal should be requested. 2. In the event that the internal appeal is unsuccessful, if the borrower remains unhappy with the banks decision or behaviour, they can ask the Credit Review Office to review the application to provide an independent and impartial review.

Stage 2 - Applying to the Credit Review Office 1. Borrower will apply credit review form to be reviewed again the credit application Stage 3 - The Credit Review Office assessment process
The opinion of the Credit Review Office will be based on an assessment; 1. That the borrowers businesses can generate enough cash to service the interest and repayments of the debt and that the borrower is demonstrating confidence in the business as a going concern. 2. That the banks risk tolerance is not being set too high and that the covenants such as security requests and pricing are not unreasonable for the levels of risk involved.

Stage 4 The Credit Review Offices credit underwriters will review the application and give an independent and impartial opinion on the credit request
The credit review will be undertaken by an experienced senior lender who will have previously worked in the financial services industry for major lending institutions. At the beginning of each review the underwriter will certify that they have had no previous involvement with the borrower or their bank.

Stage 5 Collating the review outcomes into a quarterly report for the board