Lending unit 7
- 1. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED 1 Module 3: Lending
- 2. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED LEARNING OUTCOMES After completion of this study you should be able to: • Articulate the role of lending in the banking business • Discuss the various aspects of a typical bank lending cycle and highlight the key issues at each stage • Explain the meaning of insolvency, bankruptcy and receivership from the viewpoint of the lender. 2
- 3. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Lending in the Banking Business General Principles of Good Lending Types of Advances to Customers The Practice of Lending Securities for Advances Corporate, Retail and Mortgage Lending MODULE COVERAGE 3 Typical remedies for Defaulting Borrowers Insolvency, Receivership and its Effects
- 4. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED What is delinquency? Delinquency or default refers to the failure of a borrower to pay one or more installments as they fall due on loan principal or interest. Any borrower with the whole or part of the loan repayment in arrears is said to be delinquent. Causes of delinquency 1. Inability of the customer to pay because of low cash flows (an issues that should have been investigated during the appraisal) 2. Failure or destruction of the borrower’s business 3. Adverse economic circumstances affecting business of the borrower 4. Willful default due to lack of commitment or flawed character of the borrower 5. In case of individual/ retail borrowers, death or incapacitation 6. Inappropriate loan features, terms or conditions that do not match the income/ cash flow realities of the borrower 7. Bankruptcy or insolvency of the borrower 4
- 5. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Managing delinquency Managing delinquency comprises of a two-pronged process: preventing and solving cases of unpaid installments. Preventing delinquency is a key aspect of ensuring on-time repayments. Customers will be better able to manage repayment of their loans when: i. The loan is tailored to their needs and cash flow realities – this is the duty of the bank to ensure. ii. Their businesses do well – customer’s responsibility. iii. They do not have a crisis that makes repaying difficult – environmental aspects that can be managed through careful planning and insurance. iv. They (borrowers) are honest and trustworthy. Solving delinquency can be done in a number of stages, from least to most serious. The following options are only examples. These are not hard rules but some of the many alternatives available to bankers when the borrowers default. o Visiting or calling the borrower to tell them that their loans are in arrears and they need to immediately pay up. 5
- 6. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED o If the situation is temporary and the borrower is likely to revert to good loan service, explore rescheduling the loan repayment to accommodate the borrower during the hard time. o Using written threats, in letters to warn the borrower and give them limited time within which to pay up. o Offsetting any amount standing on the account of the borrower’s current, savings or deposit accounts to repay the loan. o By mutual agreement, selling the borrowers’ assets without publicity, and hand them the cash in excess of the arrears o Seizing the mortgaged assets and selling them if the borrower fails to clear the arrears within a given limited period. o Attaching the other assets of the borrower and selling them to clear the arrears (in case of retail/ individual borrowers). o Calling the guarantees and thus demanding full repayment from guarantors 6
- 7. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED END 7