How to Mitigate Risk in Commercial Lending

We all understand the basic concept that one must take a certain amount of risk in order to receive a return. When lending money, risk is the chance you take that you might not be repaid either in full or in part. Since Commercial Banks are currently only realizing returns in the single digits for conventional loans, the Bank must also try to keep the level of risk it takes appropriate to this level of return. Unlike venture capitalist and private financing sources, the Bank does not have any “upside” potential on its lending investment other than collecting interest at the agreed upon interest rate. Unfortunately, the full “downside” potential exists that the funds lent out may not be repaid as well as the potentially significant expenses associated with collection of the debt. This is also why venture capitalists and private financing sources typically get much higher rates of interest than Banks do – they take on a higher level of risk.

So, how do Banks manage their lending risk? The first step is to identify the risk factors associated with each loan transaction. The primary means that Banks have to identify the risk is by knowing their Customers, applying the traditional underwriting criteria known as the “Five Cs of Credit” to the transaction and understanding their markets. Although these may seem obvious, the history of Banking is rife with tales of Bankers ignoring these basic steps and jumping into a transaction without fully analyzing and managing the “downside” risk. Knowing your customers and the markets in which they invest are two of the simplest and most basic tools of understanding risk. Living, working and playing in the same community as your Borrower is a surefire way to know their business environment. It is also the best way to know what your Borrower’s reputation is for paying his or her bills. This knowledge of the customer is one of the Five Cs of Credit that Lenders use to determine risk levels. These measures incorporate both qualitative and quantitative analytical tools as follows: 

• Character - The Borrower’s history of how they pay their bills; 
• Capacity - The quantitative measure of whether the Borrower has sufficient income to pay its debts; 
• Capital - Also known as equity. Generally, the higher the equity contribution, the lower the risk to the Bank; 
• Collateral - An alternative source of repayment if cash flow cannot be relied upon to pay the debt; and 
• Conditions - Also known as loan structure. This refers to both the return built into the investment (the interest rate being charged) as well as the conditions placed on the accommodation to ensure the Bank is repaid (hopefully in full!). 

This last category, Conditions, is also a means by which Banks can manage the risk to a level commensurate with the return. Loan structure is considered by many to be the most effective tool Banks have to manage risk. This is because the elements of risk in a transaction can be addressed selectively, with fine tuning used to address those aspects of the transaction that are perceived to be too risky for the return. Some of the more common structural tools used are: 

• Loan-to-Value Ratio – Determines the level of Borrower equity in the transaction. The Bank hopes that the Borrower’s own cash into a deal will make it harder for the Borrower to walk away from an investment if times get tough (also known as “having some skin in the game”); 
• Debt Service Coverage Ratio - Establishes excess cash flow criteria for the investment. This calculation takes the cash flow of the business or investment property and requires there to be a “cushion” over the debt service expense. This measure also ensures the investment generates a return to the owner, otherwise there is little incentive to retain the investment. This also makes the investment more attractive to any potential investors looking to buy the business or property, thereby increasing the marketability of the asset if the Borrower sells or the Bank forecloses; 
• Financial Covenants – These are typically used to either keep the company’s financial condition from deteriorating from the levels reported at the time of the loan approval or improving certain financial measures to a more acceptable level. Some of these covenants are: Restriction on distributions not exceeding earnings, establish a maximum Debt to Tangible Net Worth (the ratio of total liabilities to tangible net worth), restrict Capital Expenditures, establish limits on obtaining additional debt, require a minimum Net Worth (either to retain or build equity in the Borrower), etc. 
• Subordination of Officer Debt – Requires the Bank loan be paid prior to loans made by Officers of the company being repaid. Since the Officers have the potential for a higher rate of return on their investment (interest and profits), the rationale is that they should wait until the lenders (Bank) who receive a lower return are repaid; and 
• Borrowing Base – Allows borrowing on Lines of Credit based on the level of Accounts Receivable, Inventory and Work in Progress (WIP). This aligns the borrowing to the assets needed to be converted to cash to repay those borrowings. 

These are just a few of the tools used to manage the perceived lending risks associated with commercial loans. These tools, if used judiciously, actually help to strengthen the Borrower’s financial condition and can serve to make the collateral more valuable (in the case of a strong Debt Service Coverage ratio).

The relationship between a Borrower and their Bank is a contract –both parties must derive value for the relationship to be a healthy one. A mutually beneficial relationship is the ultimate goal, so by strengthening the Borrower through reduction of lending risk, a stronger relationship is created which benefits both parties.

credit-cnb

Secrets behind Having a Successful Personal Lending- For Lender

As in any field, there are certain keys and secrets for success as a private lending practice that only those in money lending niche are aware of. If you are the owner of a private lending practice, you would do well to use the following insider secrets gleaned from the years of experience of your fellow private lenders. Of course these are just suggestions, but using them might make the big difference between great success or only lukewarm success.

For Lenders: Secrets to Having a Successful Personal Lending Practice

Stay local--It has been proven through the study of hard data that the private lending business model is most successful when focused locally. One great litmus test for your loans is keeping them within 100 miles of your office. You will succeed in funding loans because you are a local expert and you understand your local marketplace. By choosing this secret to private lending practice success, you are only dealing with who you know and where you know.

Discover your standard loan amount--Find out what amount of loans the majority your investors range from and market this range as your niche.  Be honest with your referral network about this amount.

Start small and build your book of business--If you are just starting out in your private lending practice, you will quickly learn that starting small is so much smarter than jumping into big loans as a beginner. Besides that, your private lending practice can earn more in fees by doing five N50,000 loans than one N500,000 loan.  You can charge more points on smaller loans, plus the fees. They close quicker and easier. Larger loans fail to close at a much higher rate than smaller loans.

Be laser focused--Be specific in your advertising and marketing.  Don’t say that you are “nationwide” and you fund “all loan types” and loan amounts.  Advertise honestly and make sure borrowers recognize how honest you are with what loan types you offer and what areas you serve. In this like most all of life and business, honestly truly is the best policy.

Be transparent--On your website and in your communications make sure that you include your company name, your personal name, your physical address, personal pictures and email addresses for all the world to see. Your authenticity and transparency will attract customers to you in a big way.

Don't be a broker, be a referrer--In your private lending practice, one secret to success is to rarely broker loans to other brokers. Refer deals instead. If you have an applicant for a loan that is out of your area, expertise or capacity, refer the prospective borrower to a reputable private loan originator. There is a very good reason for this. There is no way for every agent to get paid without over-charging the borrower.  The universe will reward you if you selflessly refer to other brokers those leads which don’t fit your niche, and you will create goodwill and karma.

Always be learning--The best investments you can make are in yourself and your business.  The books you read, the seminars you attend and the videos you watch will help you to master the disciplines you need in order to succeed as a private lender. Attend industry conferences and seek out those who have achieved success and follow their advice. Find a mentor right from the start. Hire an industry professional to review your practices and help you achieve compliance with state and federal regulations.

By using these industry secrets of success for private lenders, you will have a steady stream of leads as you grow your local reputation and build your book of business. LoanMazter wants you to be a successful private lender. We believe these tips will help you do so.

Credit  Denise Grie

Osinbajo Plans to suspends loan deductions for states also working towards sets up committee on reopening of Nigerian economy.

Prof. Yemi Osibajo, on the NEC meeting which was held on Thursday May 21, 2020,has set up a committee on the reopening of the Nigerian economy. 

As a fallout from the first virtual National Economic Council (NEC) meeting which was held on Thursday, May 21, 2020, the Vice President, Prof. Yemi Osinbajo, who is also the Chairman of the committee, has set up a committee on the reopening of the Nigerian economy.

This was disclosed in a tweet post from Prof. Yemi Osinbajo’s official twitter account and was one of the highlights of the resolution of the committee.

According to the statement, ‘’A new committee led by the Delta State Governor, Dr Ifeanyi Okowa and comprising of other members including the Governors of Lagos, Kano, Bauchi, Anambra, Plateau, and the FCT Minister, has been set up to liaise and work with the Presidential Task Force (PTF) on the best way to re-open the Nigerian economy post-lockdown’’.

In the statement, the NEC will also work with the Economic Sustainability Committee, which is also chaired by the Vice President to coordinate an Economic Sustainability Plan for the country. The plan is going to involve a financial stimulus package that could run into trillions of naira and support sectors like agriculture, power infrastructure, technology and others.

The World Bank, which was represented at the meeting, as part of its support, is proposing a fiscal relief to ensure economic stability and stimulus package for the poor and financial support to be distributed to the state governments for expenditures and interventions during this COVID-19 period.

Prof Yemi Osinbajo

✔@ProfOsinbajo

At the first virtual National Economic Council meeting, members resolved to ensure better synergy between the Federal Government and the sub-nationals.

Here is an abridged report from the National Economic Council Meeting.

Twitter Ads information and privacyThe federal government as part of its support to the state governments will be supporting the financial viability of states and reducing their financial burden by temporarily suspending the deductions tied to bailouts and others with effect from April 2020.

Meanwhile, the Minister for Finance, Budget and National Planning, Zainab Ahmed, while briefing the committee on the measures put in place by the federal government to tackle this crisis, noted that the president established the Presidential Task Force on COVID-19, the Crisis Management Committee and the Economic Sustainability Committee as a response to the coronavirus pandemic in Nigeria.

INDUSTRIES THAT FLOURISH IN COVID -19 DOLDRUMS

The Coronavirus (COVID-19) Pandemic has hit the world economy like a ton of bricks. Several businesses across various industries have practically shutdown or only operating with a fraction of their capacities due to restrictions of movement imposed by governments around the world to curtail the spread of the virulent COVID-19.

The International Monetary Fund (IMF), through its Managing Director, Kristalina Georgieva, on March 27 confirmed that the global economy has already slipped into a recession.

Also, the Organization for Economic Co-operation and Development (OECD) cut its GDP growth forecast for global economy for the year 2020 to 2.4%, the lowest rate since the 2008-2009 financial crisis.

At the national levels, the United States, United Kingdom, Italy, France and Malaysia are just a few of the countries that are appear to be heading towards a recession.

However, not every business has been negatively impacted by the global pandemic. Businesses in certain industries are actually thriving amidst the COVID-19-induced economic downturn.

Changing lifestyle and business patterns occasioned by the restrictions of movement in various parts of the world means that people are now forced to spend much of their time engaged in indoor and online activities, albeit temporarily. This has opened up a window of opportunity for online-oriented businesses.

Below are 5 peculiar industries that are currently witnessing uncommon growth in a recession-hit global economy.

Healthcare:It is no longer new that this is a boom period for businesses in the healthcare industry and its value chain. A lot of medical products and services are in high demand, such as surgical masks, hand sanitizers, disinfectants, vitamins and supplements, home healthcare and medical supplies, with many healthcare companies struggling to meet demands. Though saving lives is paramount in times like this, that has not stopped healthcare companies from smiling to the bank.

Social Media: Social media consumption has risen sharply across the world since the onset of the coronavirus crisis. According to a survey by the London-based market research firm, Kantar, in 30 economies between March 14 and 24, instant messaging giant, WhatsApp, has seen a 40% increase in usage due to the COVID-19 pandemic. Similarly, social networking platform Facebook has witnessed a 37% bump in usage since the crisis began.

Telecommuting: Organizations, including businesses, government agencies and religious bodies, have been forced to modify the way they operate in order to simultaneously keep their employees safe and ensure that their operations do not grind to a halt during the pandemic. More people than ever before are now working remotely. This phenomenon has elevated telecommuting platforms once considered luxuries to bare essentials of the work setting.

While stock markets have crashed and sent shares of travel and logistics companies like Uber and Lyft plummeting, the valuations of telecommuting companies like the video calling app Zoom have skyrocketed. The estimated net worth of Zoom’s founder, Eric Yuan, has increased by more than $4 billion since the start of the coronavirus crisis.

Gaming: The entertainment industry generally is among the worst-hit industries in the coronavirus crisis. Movie studios have suspended production, sporting events have been cancelled, cinemas are shut.

But the surge in demand for home entertainment has particularly benefited one niche business in the entertainment industry: online video gaming. US telco, Verizon, revealed in a recent report that video gaming traffic on its internet network during peak hours has spiked by as much as 75% since the shutdown in the United States began, and similar figures have been reported by other sources across other gaming hubs around the world.

E-learning: For many, this lock down is an opportunity for self-improvement. And they have seized it to develop their knowledge and expand their skill set by taking online courses in software development, cooking, makeup, fashion design, foreign languages and entrepreneurship, among others. Parents have also enrolled their children in online academic programs while waiting for schools to resume.

In all, apart from businesses in the healthcare industry, the biggest winners are online-based and oriented businesses. A key takeaway for entrepreneurs during this economic gloom and doom should be the need to embrace the digital economy. 

Nnawetanma.C

INDUSTRIES THAT MAY BE OUT OF BUSINESS POST CORONAVIRUS ( Covid-19)

Businesses have been classified into low risk, medium risk, and high risk. Those with high risk could be out of business.

Nigerian Based market research organisation, Intelligence published a list of industries that will be positively and negatively impacted by the Covid-19 pandemic. This is part of the risk-based firm’s series of discussions on the impact of Covid-19 on the Nigerian Economy.

In a published report seen, the company takes a look at Nigeria in the age of the coronavirus. The pandemic which broke out in Wuhan China in December 2019 has killed over a hundred thousand people across the world, with over three million people infected as well as about a million recoveries.

With its attendant devastating effects, it has impacted the global oil economy which makes up 7% percent of Nigeria’s GDP, and with the recent price war between Saudi Arabia and Russia, it has sent shocks to the Nigerian economy as oil sold below the $30 mark. held a Seminar during the week on the theme.

Industry Impact

In a look at how the various sectors of the economy will fare, the report noted that bakery, beverages, chemicals, healthcare products, pharmaceuticals, telecommunications sectors face low exposure, compared with restaurant, clothing and textile, education, electricity, agriculture, real estate, hospitality as well as tobacco sectors that it classifies as medium risk.

Automobile, banking and finance, entertainment, leisure oil, and gas as well as trading and transportation were identified as high exposure and are more likely to experience disruption compared with the other sectors.

How the industries were chosen

According to SBM intelligence, between Thursday, 16 April 2020 and Sunday, 19 April, it conducted a series of phone interviews with practitioners in various industries to ascertain how their industries were faring as a result of the lockdowns in federal government imposed lockdowns in Abuja, Lagos State, and Ogun State; as well as the state government lockdowns in various other states. Their questions sought to determine the direction the respondents felt their industries would go after the pandemic was over.

What this means: As the Nigerian economy continues to reel from the impact of the economic lockdowns, businesses across the country are jostling to limit their financial and business exposures. Most organisations have rolled out their business continuity plans designed to ensure that their business operations are not severely impacted. Nevertheless, there will still be winners and losers with varying degrees of exposures to the pandemic.

For businesses considered highly exposed they will have to review their business model and deploy painful reorganizations if they are to remain in business post-Covid-19. Those on medium risk exposures will also have to adapt their models to reduce the impact while those on low-risk exposure need to consolidate on their operations and also taking full advantage of the opportunities being offered.

 Credit-nairametrics, SBM Intelligent,

IMF Lists Unpopular Policies CBN Must Reverse

The IMF wants the CBN to end some of its harshest policies including lifting the forex ban on 41 items.

The International Monetary Fund, IMF on Tuesday approved a sum of $3.4 billion via a Rapid Financial Instrument to Nigeria. The loans come at a period when countries across the world are battling with the Covid-19 pandemic and the crash in crude oil prices.

While the loans do not necessarily come with strings, the IMF did reveal in its press release acknowledging that Nigeria was on the path to unifying its exchange rata and moving towards a flexible exchange rate regime. As Nigerians get acquainted with the terms of the deal, the IMF released more reports shedding more light into what the country might expect to happen in the coming weeks and month should they have their way.

One of such policy changes it demands from Nigeria is a change in some of the most loved monetary policies, currently in place under the Godwin Emefiele led central bank. The CBN Governor has often defended his heterodox policies claiming it is expedient if Nigeria were to dislocate itself from its thirst for foreign imports. The IMF may well be on a collision course with the CBN if it wants the CBN to reverse these policies.

CBN Policies IMF wants to be reversed.

Exchange Rate Unification: The CBN currently maintains a multiple exchange rate regime where it buys and sells forex through several windows. The IMF wants the CBN to collapse these windows into one.

“With the spread across the various exchange rate windows now very narrow, this is also a good moment to immediately move to full and formal unification—e.g., by converging all foreign exchange windows to the I&E window. This critical step to ensuring a well-functioning market would be helped by the CBN’s calibration of its foreign exchange sales in the market at a level commensurate with protecting central bank reserves while taking into account low international oil prices and reduced FX demand. A unified and more flexible exchange rate will be an important shock absorber, especially in turbulent times— with CBN FX interventions limited to smoothing large fluctuations in the exchange rate.” IMF 

The CBN already moved towards this after it devalued from N305 to N360 in its official window. However, the rate still differs from that of the BDCs and the I&E window. CBN also does not have a flexible exchange rate and have resisted this for years under Emefiele. This will be one of the greatest ever policy changes in Nigeria’s economic history and goes against every defense President Buhari has put forward defending a fixed exchange rate regime. It will be a huge victory for more market-friendly analysts if this happens under Emefiele and Buhari.

Remove FX Restriction on Imports: The IMF also wants the CBN to remove all FX related restrictions on imports. This includes its flagship ban on the sale of forex to import on 41 items, a major policy thrust of Emefiele.

“Along with exchange rate unification, existing FX restrictions on goods imports should be removed and monetary policy tightening through more orthodox tools (i.e., no discretionary CRR that distorts banks’ liquidity management) resumed to enable the CBN to reach its single-digit inflation target.” IMF

Dropping this policy will be a very difficult one considering how critical it is to the CBN’s import substitution policy. Once it does this, it would have done a complete 360 degrees to one of its most controversial policies. The CBN believes these bans have led to an increase in the local production of rice and a boost to the agricultural sector.

Stop the CRR & LDR policy: Banks hate the CBN’s increase in CRR and the CBN’s frequent unilateral debits of its deposits due to non-compliance of the load to deposit ration monetary policy. The IMF seems to hate that too.

“Recent regulations to spur lending through the loan-to-deposit ratio, which encourages higher credit risk and a shorter maturity structure, should be eliminated. Banks’ own capital and liquidity buffers should remain the first line of defense, which in the case of Nigeria means that supervisors could temporarily allow banks to drop below the minimum capital requirement (currently 15 percent for large banks, which is significantly above the Basel II 8 percent requirement).” IMF

The CBN’s CRR & LDR policy is at the heart of the bank’s quest to push banks away from the safety of treasury bills and OMO towards the more risky private sector lending. Some naysayers believe the CBN has an ulterior motive which probably includes defending the naira. Getting the CBN to also reverse this policy will be a huge win for banks who have complained that the policy affects its profitability growth.

It will be interesting to see how the CBN reacts to these demands from the IMF and how quickly it could reverse its much-maligned policies if it does agree to reverse them.