RAPPORT BANGLADESH LTD Dhaka-Bangladesh

Presentation by

Professor Emeritus & Founder Principal, Hailey College of Banking & Finance, University of the Punjab, Lahore Pakistan (2003----), Member Governing Council, International Federation of Accountants (IFAC), New York (1997-2000), President, South Asian Federation of Accountants (SAFA) (1997), President, Institute of Cost and Management Accountants of Pakistan (1997-2000), President, Association of Management Development Institutions of South Asia (AMDISA) (1993-96), Pro Vice-Chancellor University of the Punjab, Lahore (1994-1996), Founder Director, Institute of Business Administration (IBA), University of the Punjab, Lahore (1973-1996) and senior faculty member of Hailey College of Commerce, University of the Punjab(1965-73) & Senior Faculty members, Hailey College of Commerce, University of the Punjab, Lahore (1965-73)

Prof. Dr. Khawaja Amjad Saeed

EventTraining Program

Venue & DateDhaka, March 10, 2012

Title of Paper CORPORATE LENDING RISK ANALYSIS

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PRESENTATION FRAME Section A:

1.Risk: Concept Characteristics Categories Types

2.Risk Management Model: RMMM

3.Risk Assessment: Environment Management Approach Organizational Analysis

4.Risk Mitigation: Characteristics of Successful Banks Mission Statement Market Research Innovation

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PRESENTATION FRAME 5. Seven Cs Analysis: Risk Evaluation 6.NIB: Lending Models in Pakistan 7.Projects Risks:

Risks Safeguarding Against Project Cost Over Runs Project Profile

Section B:Workshop Exercise, Problem Solving Session and Case Analysis 1.Risk Assessment:

Sensitivity Analysis 2.Financial Analysis Exercise 3.Case Study

SECTION: AA-1: RISK

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Concept:1. Loss of part or all of the actual.2. Lower Yield on an investment than expected. 3. “While it is futile to try to eliminate risk and

questionable to try to misuse it; it is essential that the risks taken be the right risks” (Peter Drucker).

Characteristics:1. Uncertainly: May or may not happen.2. Loss: If the risk becomes a reality, losses will occur.

A-1: RISK

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A-1: RISK

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Types - Specific

- Project Risks:- Budget - Schedules - Personnel - Resource - Customers

- Technical Risks: - Design - Implementation - Verification - Maintenance - Market Risk- Management Risk

A-2: RISK MANAGEMENT MODEL

RMMM1. Risk Mitigation 2. Risk Monitoring 3. Risk Management

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A-3: RISK ASSESSMENTENVIRONMENT

A: Traditional 1. Internal (4):

- Revenue - Expenditure - Finances - Human Resources

2. External (4):- PEST

B: Current: Task Orientation 1. Competition 2. Customers 3. Suppliers4. Distribution Channels 8

A-3: RISK ASSESSMENTMANAGEMENT APPROACH

1. Management Controls 1. Vision2. Mission 3. Objectives 4. Organization

2. Marketing 1. Market Research (+Tools)2. Sales Trends 3. Sales Promotion 4. Sales Training 5. Sales Controls 6. Sales Force 7. Competition 8. Product (s)9. Pricing 10. Distribution 9

A-3: RISK ASSESSMENTMANAGEMENT APPROACH

3. Manufacturing 1. Plant 2. Equipment & Facilities 3. Plant Operations

4. Production Planning 1. Purchasing 2. Material Controls 3. Production Planning & Control 4. Quality 5. Cost Control

5. Industrial Relations1 +PR

6. Legal

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A-3: RISK ASSESSMENTORGANIZATIONAL ANALYSIS Focus

1. Customers - Enthusiastic 2. Performance - Financial 3. People - Inspired

Aspects 1. Foundation - Strong 2. Customer - Special3. Goals - Bold4. Approach - Simplify, Simplify &

Simplify 5. Technology - Your Servant6. Act - Fast7. People - Unleash the Power 8. Lead - With Care 11

A-4: RISK MITIGATIONCHARACTERTICS OF SUCCESSFUL BANKS

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1. Culture : Open 2. Values : Strong and Shared 3. Performance : Profit 4. Orientation : Customers 5. Products : Investment in New 6. Leadership : Strong and Consistent 7. Recruitment : The Best Persons 8. Investment : In Training and Career Development 9. MIS : Operational 10.Credit Process : Strong and Balanced

A-4: RISK MITIGATIONMISSION STATEMENT

Clear and Concise Statement of: 1. Who we are 2. What we Produce/Serve 3. Market we Serve 4. Philosophical Concerns 5. L.T Objectives 6. Being:

- Result Oriented - Specific - Attainable

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A-4: RISK MITIGATION: MARKET RESEARCH 1. Total Market:

1. Increase 2. How Much:

- At home - Abroad

2. Share of Market:1. Maintain 2. Increase

3. Customers: Present & Potential:1. Continue to buy 2. Who are they 3. Where are they 4. Who takes what 5. Will they continue to need our products or service6. What do they use these for7. Competition8. Obsolescence 14

A-4: Risk Mitigation:INNOVATION

1. Product 2. Process 3. Function4. Inter-Departmental

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A-5: SEVEN (7) Cs ANALYSIS:Risk Evaluation

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1. One “C”- Collateral 2. Three “Cs”- Collateral - Capacity - Condition 3. Five “Cs”1. 1-3 of 2 above 4. Capital 5. Character 4. Seven “Cs”1. 1-5 of 3 above 6. Country Risk 7. Currency Risk

A-6: NIB: LENDING MODES IN PAKISTAN

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Focus Modes

A: Lending (2) 1. Service Charge 2. Qarde Hasna

B: Trade Related (6) 1. Mark up 2. Purchase of movable or immovable

Property with buy back agreement or otherwise

3. Purchase of trade bills 4. Hire purchase 5. Leasing6. Development charges

C: Investment (4)

Total 12

1. Musharka or profit and loss sharing 2. Equity participation 3. PTC and Modarba Certificate Sharing 4. Rent Sharing

A-7: PROJECTS:RISKS

I: Institutional Factors (10)1. Final Engineering2. Concluding Contracts with Consultants 3. Acquiring Right of Way 4. Utilities 5. Procurement Speed of Equipment 6. Funds diverted to other projects 7. Management Consultant Problems 8. Inadequate Supervision 9. Shortage of Local Funds

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A-7: PROJECTS:RISKS

II: Technical Factors (7)1. Uncertainty of Original Engineering

Estimates 2. Conservative Engineering Estimates 3. Unforeseen technical problems (Soil,

slides, water ----)4. Faulty Design 5. Inefficient Contractors 6. Disputes & Claims of contractors 7. Change in Specifications (Additional

work-----)III: Economic & Political Factors (3)

1. Change in Project Composition 2. Price Increase 3. Labour Shortages & Disputes Total 20

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A-7: PROJECT RISKSSAFEGUARDING AGAINST PROJECT COST OVER RUNS

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1. Consultants-Careful Selection 2. Consultants-Be Experts and Cost Estimators 3. Contingency Allowance-realistic Estimates 4. Reduce Contractors Fears (Risks) by Proper

Explanations in Bidding Documents 5. Supervision of Site-Sound

A-7: RISK MITIGATION:PROJECT PROFILE

1. Name and Brief Description 2. Criteria

1. Importance to economy 2. Operationalability 3. Viable Results 4. Size

3. Promoters 1. Names 2. Addresses 3. Financial Position

4. Investment 1. Cost 2. FX 21

A-7: RISK MITIGATION:PROJECT PROFILE

5. Available Finances 1. Amount 2. Terms & Conditions 3. Sources

6. Preliminary Assessment 1. Executing Agency 2. Inputs3. Water Supply4. Labour Situation 5. Management 6. Production Methods

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A-7: RISK MITIGATION:PROJECT PROFILE

7. Amount Needed 1. Form2. Amount 3. FX 4. Timing of Utilization

8. Information 1. Sources

9. Remarks 1. Regional Head 2. Aspects:

- Financial Status - Technical Acumen - General Reputation of Applicant- Feasibility - Marketability of Products 23

SECTION BB-1: RISK ASSESSMENT: SENSITIVITY

ANALYSIS

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Given Data: Taka. 000

1. Estimated Investment (Taka) 1,0002. Desired Rate of Return (%) 203. Estimated Units Contributing Normal Value (Number)5004. Estimated Variable Cost (Taka) 1,0005. Estimated Fixed Cost (Taka) 8006. Estimated Revenue at Prevailing Price (Taka) 2,000Required:1. Visualize several, at least, three sensitivities.2. Quantify the factors at (1) above.3. Compute the impact of all the three sensitivity factors.4. Offer your comments to assess operational risk.

B-2: FINANCIAL ANALYSIS EXERCISE

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1. Nijat Hussain & Co. Ltd has approached you for financial assistance.

2. Three years balance sheets and income statements figures have been made available to you.

3. Required: a. Undertake trend analysis of time series to develop a

perspective b. Develop initial thoughts as to what financial policies

the company is following in respect of: Resource Mobilization Resource Utilization Protection of Financial Resources:

Risks which the company is facing Financial Management Problems

Distribution in Terms of Dividends

5. Having built a perspective, undertake financial analysis exercise by computing various ratios:a. Liquidityb. Solvencyc. Profitability

6. Prepare credit appraisal report.Write up for discussion is enclosed.

B-2: FINANCIAL ANALYSIS EXERCISE

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B-3: CASE STUDY: Bank’s Role: Managerial: Doubling the Profit

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Jauhar Brothers, manufacturers of all metal garden and porch furniture, presented their operating statement as of June 30, 2011 the result of six months operations.

Sales TAKA Taka

525,000

Cost of Goods Sold:

Variable Expenses:

Materials

Labour

Superintendence

Heat, Light,

Power

52,500

70,750

21,000

5,250

Rs. 149,500

Fixed Expenses:

Superintendence 9,000

Heat, Light, Power 3,000

Depreciation 6,000Repairs to Building 7,500 25,500

Cost of Goods Sold 175,000

Gross Profit 350,000

Selling and Administrative Expenses:Variable Expenses:

Commission 105,000Advertising 5,250

110,250Fixed Expenses:

Officers Salaries 30,000

Advertising 30,000

Office Salaries 72,000Miscellaneous

Expenses30,000 162,000

Total Selling and Administrative

Expenses

272,250

Net profit Taka 77,750

B-3: CASE STUDY: Bank’s Role: Managerial: Doubling the Profit

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Based on discussions held, it transpired that the above enterprise was operating at 60% of its installed capacity. However based on marketing survey carried out, it was concluded that the enterprise has good market potential which could be tapped by increasing its capacity to 85%. Accordingly the bank has been approached to finance the expansion plan which will result in almost doubling the profit.Required: The enterprise seeks your guidance in respect of management decisions to be taken to meet the challenge to raise the capacity from 60% to 85%. With ensequential benefits. Suggest a sound managerial plan to achieve the above goal so that the bank can then guide the enterprise to achieve desired results and also pave the way to finance expanding needs.

B-3: CASE STUDY: Bank’s Role: Managerial: Doubling the Profit

B-3: CASE STUDY

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1. Guidelines for developing a managerial decision plan to raise the capacity from 60% to 80% are suggested below: 1. Sales:

- Assume a constant price. - Can suggest others also.

2. Labour:- Suggest some percentage of sales: 15%.- This will serve as motivational.

3. Superintendence:- Variable: suggest some percentage: 3%. - Fixed suggest some increase: Taka: 8,250.

4. Advertising:- Present fixed and variable amounts are adequate

for all volume upto 60%. - Variable rate may be 5% of such increase.

B-3: CASE STUDY

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