Lending: Products, Operations and Risk Management

Chapter		Candidates Learning Outcome		Cognitive
				Levels
	Introduction	Candidates should be able to:		K	U	A
1	Lending- A core banking	a.	Describe the role of bankers as lenders		*
	practice/function
		b.	Discuss the importance of building a disciplined lending culture		*
		c.	Discuss the importance of cash flow lending as opposed to security-based lending		*
2	Lending Products	Candidates should be able to:		K	U	A
2.1	Categories of borrowers
2.1.1	Business borrowers	a.	State  various reasons for business borrowing	*
		b.	Describe the types of lending products available to business borrowers		*
		c.	Differentiate between short term and long term lending		*
		d.	Differentiate between funded and non-funded facilities		*
		e.	Describe various types of long term lending facilities available to business borrowers		*
2.1.2	Individuals/Consumers	a.	Describe the characteristics of an individual borrower and explain how they differ from		*
			business borrowers
		b.	Describethe types of products available to individual customers		*
		c.	Explain the purpose of individual/consumer borrowing and state the classification of loans		*
			under consumer lending
2.2	Regulations and	a.	Discuss the SBP laws relevant to deciding the lending limits for both business and consumer		*
	Practices		borrowers
		b.	Discuss the lending exposure limits as per SBP regulations		*
		c.	Describe the regulations concerning lending disclosure and reporting requirements for		*
			consumer lending
		d.	Describe the regulations concerning lending disclosure and reporting requirements for		*
			business lending
		e.	Define f credit policy, target markets and risk assessment criteria and discuss their importance	*
			in lending decisions
		f.	Explain prudential regulations concerning the business/commercial lending operations		*
		g.	State the minimum requirements for consumer financing as per the prudential regulations	*
		h.	Explain the general SBP Prudential regulations concerning consumer lending		*
2.3	Pricing	a.	Recall the various types of pricing mechanisms available across the industry	*
		b.	Explain the industry-wide methodology used for calculation of pool rates		*
		c.	Explain the concept of internal cost of funds and discuss how it is determined		*
		d.	Explain the process of developing a pricing model based on floating mark up rate		*
		e.	Discuss the pros and cons of using a floating mark up rate as compared to using fixed rate		*
		f.	Discuss ‘risk based’ and ‘relationship yield’ pricing models		*
		g.	Explain the concept of opportunity cost, risk reward pricing and re-pricing intervals		*

	Management	Candidates should be able to:			K   U   A
3.1	Overview	a.	Explain the importance of evaluating the level of risk in lending			*
		b.	Differentiate between risk assessment and management			*
		c.	Discuss the risks posed by the economic environment to lending operations			*
		d.	Analyze the importance of a diversified risk portfolio				*
		e.	Discuss the role of corporate governance and organizational structure in ensuring smooth			*
			running of lender’s operations and its impact on the bank’s assessment of lender’s risk rating
		f.	Describethe various types of SBP reporting requirements to ensure industry wide effective risk			*
			assessment and management for business and consumer lending
3.2   Sources of Lending risk		a.	Recall various types of risks that impact the lending decision		*
		b.	Discuss the concepts of obligor risk rating (ORR) and facility risk rating (FRR)			*
		c.	Discuss the obligor risks associated with lending to an individual and a business client			*
		d.	identify the different types of industry risks that must be considered while making the lending		*
			decision
		e.	Explain	the transaction failure risk and suggest ways to avoid it		*
		f.	Explain	foreign exchange and interest rate risk		*
		g.	Present	other factors which can be a source of risk to the bank’s lending portfolio		*
		h.	Evaluate the sources of risk and its impact on obligor risk rating and pricing				*
3.3	Risk Assessments	a.	Discuss the ways in which a market check can be conducted for a consumer and business			*
			client
		b.	Identify various means of market research available for consumer and business clients		*
		c.	Explain the role of data check, search report, eCIB and SBP risk rating requirements in the risk			*
			assessment process
		d.	Describe the SBP’s risk rating requirements and discuss the impact of this step on overall			*
			industry risk assessment practices
		e.	Discuss the SBP Prudential Regulations relating to risk management for business clients			*
		f.	Discuss the SBP Prudential Regulations relating to risk management for consumer clients			*
		g.	Discuss the eligibility criteria for consumer lending decisions for various products under			*
			consumer portfolio
		h.	Calculate relevant financial ratios important while making business lending decisions				*
		i.	Demonstrate the use of debt burden in making lending decisions for consumer clients				*
3.4	Risk Management	a.	Discuss credit policy and state its salient parameters			*
		b.	Differentiate between consumer and business parameters in the credit policy			*
		c.	Explain what is meant by delinquent/remedial portfolio and the manner in which banks			*
			manage these
		d.	Discuss the methods of measuring delinquency within a consumer and business portfolio and			*
			explain the role of trend analysis
		e.	Discuss the various delinquency control measures and comment on their accuracy			*

		f.	Explain the concept of collection policy in the consumer portfolio and remedial management			*
			in the business portfolio and recall its prominent parameters
		g.	Discuss the concept of recovery policy and recall its prominent parameters			*
		h.	Differentiate between collection and recovery policies			*
		i.	Appreciate few collection and recovery strategies being used industry wide			*
		j.	Explain	the risk management strategies being used for un-secured lending products under		*
			the consumer product umbrella
		k.	Explain the general reserves requirements as imposed by SBP on banks dealing in consumer			*
			lending
		l.	Explain	the SBP regulations concerning collection methodology and describe the strategies		*
			adopted by banks for both business and consumer lending
4	Collateral and
	Documentation	Candidates should be able to:			K   U   A
4.1	Different types of	a.	Recall the different types of financing agreements available in the industry		*
	financing agreements
4.2	Types of Collateral	a.	Describe different types of collaterals being used industry wide with respect to consumer and			*
			business lending
		b.	Describe  various attributes of a collateral and explain the concepts of ease of enforcement,			*
			realization and marketability with regard to the type of collateral
		c.	Differentiate between the pledge of paper securities and that of goods			*
		d.	Define	‘hypothecation’ and identify instances where this form of collateral is used	*
		e.	Explain how ‘assignment of receivables’ is used as collateral and recall instances where this			*
			form is used
		f.	Explain the use of ‘mortgage of immovable assets’ as collateral and state its application			*
		g.	Explain the concept of stated and implied lien over customers assets			*
		h.	Explain	the concept of charge, its types and ranking		*
		i.	Define	‘guarantee’ and provide examples for their use	*
4.3	Types of collateral	a.	Recall	different types of collateral agreements	*
	documentation
		b.	Differentiate among a hypothecation, mortgage, lien, floating charge and a pledge agreement			*
4.4	Safe-keeping of	a.	Discuss	in-house safe keeping arrangements and explain their modus operandi		*
	borrower/customer
	documentation	b.	Discuss the ex-house safe keeping arrangements and explain their modus operandi			*
		c.	Write the arrangements for storage of documents		*
		d.	Explain the system of recording used for document storage			*
		e.	State the procedures to be followed for depositing and retrieving documents and discuss the		*
			precautions that must be exercised in the process
		f.	Recall the scope of SBP’s guidelines concerning the handling of lending documents		*

4.5	Bank’s risk under various	a.	Discuss the risks faced by banks under various types of collaterals used		*
	types of collateral
		b.	Recall strategies adopted by banks and regulatory bodies to mitigate this risk	*
		c.	Analyze the impact of a poorly managed collateral			*
4.6	Monitoring of charge/	a.	Define the term Muccudum and describe its role	*
	margin
		b.	Describe the conditions and methodology used for appointment and rotation of a Muccudum		*
		c.	Discuss the obligations of the custodial services under the monitoring arrangement		*
		d.	Explain the monitoring methodology of immovable assets and that of stock reports and		*
			valuation
		e.	Differentiate between monitoring methodology of guarantees and that of insurance policies		*
		f.	Explain the monitoring of guarantees in terms of issuer’s status, validity and conditions for		*
			claims
		g.	Explain the monitoring of insurance policies in terms of issuer’s status, validity and conditions		*
			for claims
		h.	Discuss the concept of a search report for charge monitoring		*
		i.	Describe the parameters ( defined by whom) and discuss the importance of a proper and		*
			credible source for monitoring prices of financial assets and collateral
5.	Management of Credit	Candidates should be able to:		K	U	A
5.1	Facility account	a.	Recall different ways of facility account monitoring in use	*
	monitoring
		b.	Discuss the difficulties that may be encountered in operating the facility within present limits		*
		c.	Recall the requirements for meeting facility turnover and quantum of business booked under	*
			the facility
		d.	Differentiate between monitoring frequency of peak/low facility utilization and that of		*
			irregularities in the accounts
5.2	Facility monitoring	a.	Discuss the significance and use of reports on activity in facility accounts		*
	systems
		b.	Define facility monitoring systems	*
		c.	Explain the use of due date diaries for retrieval of due amounts or settlement of facilities in a		*
			facility monitoring systems
6.	Past Due Accounts/Over			K	U	A
	Due Accounts
6.1	Classification	a.	State the basis for classification of past due or delinquent accounts	*
		b.	Discuss the action steps based on classification level of past due accounts		*
6.2	Past due account	a.	Discuss the management techniques used in dealing with past due accounts		*
	management
		b.	Comment on customer contact modes used depending on severity of failure in meeting		*
			commitments in case of business and consumer lending
		c.	Discuss the regulations as imposed by SBP concerning the collection and recovery processes		*
			while dealing with consumer and business clients
		d.	Discuss the global best practices and subjective classification adopted by various banks as part		*
			of risk management strategy
		e.	Recall the process of determining net exposure and status of financial assets and collateral in	*
			case of delinquency
		f.	Discuss the conditions for activating remedial actions in case of delinquency		*

6.3	Rescheduling and	a.	Explain the concept of rescheduling and restructuring of borrower accounts		*
	restructuring of borrower
	accounts	b.	Discuss the need and benefit obtained from rescheduling borrower accounts		*
6.4	Loan loss provisioning	a.	Discuss the concept of loss provisioning for lending portfolio		*
		b.	State the importance of loan loss provisioning and discuss its benefits in financial reporting	*
6.5	Write Off	a.	Explain the concept of write off loans and state the conditions for write off		*
		b.	Discuss the concept of FSV in case of write off and state the regulatory requirements		*
			governing it
		c.	Discuss the SBP regulations concerning write off loans		*

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