MANAGE THE RATE OF INTEREST ON YOUR LOAN
At the initial stages of the project the small & medium scale entrepreneurs are enthusiastic, particularly in coordinating the funds for the project. by and large they run around with the loan proposal for getting “Best Rate of Interest”, meaning Lowest Rate of Interest and also for lowest Processing Costs. Their Financial and non financial consultants also push them for such bargain. These probable entrepreneurs have tendency to approach more than one bank for such bargains. Entire focus is on keeping the cost of borrowings at the minimum level. However, the rate of interest at the time of sanction is subject to change in future and it is possible to get the Rate of Interest reduced in subsequent years after the commercial production starts.
Similar is the case with the existing units in SME Segment. Many of the entrepreneurs are ignore about the process of what is known as “Risk Assessment “at branch leve”l and therefore do not pay attention to the process of getting interest rates reduced during the Risk Appraisal by the bank at regular interval, generally a year or at the time of “renewal of the existing Cash Credit Limits” and thereby reduce the cost of borrowings instead of bargaining or “Shopping” for it in the initial stages. I am discussing this subject from the Borrower’s perspective in the following paragraphs
Lending money involves risk for banks. Therefore RBI has also issued various circulars for risk management by banks. Risk management exercise is also vital function for the bank to estimate and monitor its Loan Assets.
Every individual Loan Account is a unique asset carrying specific degree of risk. Therefore banks try to assess the risk involved in each account in a systematic method by giving least scope for subjectivity. Accounts showing higher risk factor are closely monitored, or higher interest rates are applied to risky accounts as compared to the accounts carrying lower risk or higher comfort level. Therefore it is possible to get the originally sanctioned interest rate reduced in subsequent “risk review” by the branches.
The Risk Assessment
Process involves answering a structured questionnaire. Various questions are generated under each category of risk with Multiple Options for answers. Predefined marks are given to the answers of each option. Therefore the officers assessing the risk do not have any Discretion or Discriminating Power. For example, following options and respective mark structure can be designed for Stock statements:
All statements are regular in a year 12 Marks
Upto 2 defaults in a year 9 Marks
Upto 4 defaults in a year 8 Marks
More than 4 defaults in a year 6 Marks
In this case, the Risk Assessing Officer can not give 10 or 7 marks to any borrower even if he chooses to do so.
Various types of Risk areas attached to a Loan accounts can be classified as under
- Financial Risks
- Performance and Profitability
- Security Risks
- Management Risks
- Technology Risks
- Regulatory risks
- Industry Specific Risks
While assessing the degree of Financial Risk in relation to any Loan account, the bank relies on the various financial ratios. Important of them are TOL/TNW, Retained Earnings (%), DSCR, DE Ratio for Term Loans and Current Ratio, Age of Debtors, Age of Creditors, Working Capital Turnover Ratio etc are considered for assessing the risk of Working Capital Facilities. Needless to say lesser is the risk if the ratios are favourable.
Bank reviews the value of security to ensure that market value of the Securities offered is adequate to cover the Loan outstanding through out the tenure of loan. Situations like downward trend in the market value, Non Payment of installments, litigations if any after the disbursement, inadequate Insurance Cover etc may increase the risk of the bank. Some times there can be a possibility of erosion of the Margin also and in that case risk is the maximum. In respect of Stocks and Debtors, factors like realizable value of stocks, Shelf life of the stock, slow movement of finished goods, slower recovery of debtors, bad debts etc are important parameters to assess the risk relating to Securities.