Dear Mr. Bacon
Although your comments have cleared some areas, I believe that we should treat the financial standing report from a banking perspective, simply because it is the product of the bank for which there are procedures/approaches that might not be clear enough.
To keep track with your comments I will deal with them point by point:
1. “A BANK ISSUES SUCH A REPORT BASED ON ALL THE INFORMATION HISTORICALLY AVAILABLE TO IT AT A MOMENT IN TIME.”
The phrase “at a moment in time” is not correct and cannot be applied for such report. In the accounting and banking jargon this is applicable to the balance sheet only which is a reflection of the financial standing of the customer at certain point in time; to specific “as at 31/12/2001” for example.
2. “MERELY THAT THE BANK MAY NOT HAVE ALL THE INFORMATION AND THAT SOME OF THE INFORMATION WHICH THE BANK USES AS A BASIS OF ITS REPORT COMES FROM THE COMPANY IN QUESTION. THEREFORE THIS COMPANY MAY MANIPULATE THE INFORMATION TO SUIT THE CIRCUMSTANCES.”
A simple tracking of the procedures followed by the credit or corporate department in a bank will convince you that this is not the case. The sources of information for the bank to come up with a financial standing report on his customer is not limited to the financial statements provided by that customer, although they are the backbone of such report. In addition to the four financial statements (balance sheet, income statement, cash flow, and retained earning statement) the bank resort to the following resources: Market inquiry, bank inquiry, visits, study of the organizational structure of the company, it’s management and operation style, contact with suppliers and clients, study of labor relations and so on.
Another important thing to note is that there are a lot of means by which the bank can detect if there is a beautification of the financial statements provided by the customer. A smart credit analyst can easily verify the authenticity of the figures in financial statements through cash flow analysis. The cash flow statement presents the cash generated from different streams of activities. The analysis of cash from operations, cash from investment or paid in investment and finally cash from equity or lending can tell you what the customer did not want to tell.
3. “BANK REPORTS ARE PERHAPS THE BEST INDICATORS WE HAVE GOT AS TO THE FINANCIAL STANDING OF A COMPANY, BUT IT IS NOT A GUARANTEE AND IT CANNOT PREDICT THE FUTURE.”
This statement is perhaps the most critical one. Let us ask a simple question why would the bank do a financial analysis? Why would the bank issue a financial standing report?
We have to remember that lending is never a history. The purpose of the financial analysis is to come up with a crystal vision of what is the financial standing of the customer and document this in a form of a report. Therefore the whole process is to make assumptions and forecast the future performance of the customer towards the bank. Hence the report is a culmination of a process of future predicted events based on historical performance of the customer. To clarify that, please consider the following future assumptions that the pre-report stage analyse; sales, to predict potential increase in sales, trend of sales, ability to repay on due dates. In addition to that there are several tests conducted by the bank for the purpose of forecasting like expenditure analysis and sensitivity analysis in order to forecast any potential scope of variance in the future for a particular subject such as inventory, sales or COGS; cost of goods sold.
Finally I advise the L/C practitioners to discuss with their credit department and the remedial/risk department whether to accept this type of report as part of the documents to be presented under the L/C. This is the least thing they could do if they do not appreciate the seriousness of this report.
Disclaimer on the standing of parties.
-
hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Disclaimer on the standing of parties.
We agree with Hatem and would like to add some more points to supoport his opinions.
(1) A bank certificate of financial health may not be true or reliable under certain occasions.
(2) We had one DC dispute case where an applicant was in bad financial situation, oweing an issuing bank million of dollar and was unable to pay back within the next two years. The bank was forced to hide this fact to other creditors. Otherwise they might force the applicant to declare bankruptcy and the issuing bank might get nothing.
(3) So in order to prolong the business life of the applicant with the hope to get back the million dollar loan on <one fine day> (like the name of a famous aria in Puccinni's "Madame Butterfly"), the bank was forced to issue untrue certificate of financial health to enquirers.
(4) Please do not forget that banking is also a business by itself, although we have due diligence duties, yet some bankers may not necessarily play by the rule. We have seen insiders within the banks being prosecuted from time to time for supporting DC frauds in Asia, Europe and elsewhere.
(5) Banks should not look at the static things to evaluate the credit worthiness of their customers. They should practise "MBWA" (Management By Wandering About) and go to the marketplace to visit their customers' offices, talking to their staff, including hearing the gossips and rumours (but with intelligent ears) and doing other <non documentary> activities.
(6) The <Based on documents alone> concept is only good for DC operations and not suitable for credit evaluation.
(7) One time I was invited to attend an interview for a senior position in the Carrie/Carling? Conglomerate (sound like "Guy Ling" in Cantonese, the most popular language of Hong Kong. Would a member from Hong Kong give us the exact English name that we have forgottten). That conglomerate had defaulted most of the big banks in Hong Kong by a very sophisticated plot of fraudulent operations, involving billion of Hong Kong Dollar.
(8) When I took the lift during rush hours in the morning, that stopped at each floor, I observed that there were two glamourously-uniformed, tall and handsome security officers standing on guard the lift entrance on EVERY floor.
(9) I said to myself: "Such glamourous display should cost the conglomerate a lot of money and this is totally unnecessary unless they have a hidden agenda - to impress the members of the public that they are very rich, famous and secured".
(10) I also said to myself: "If you are really rich and famous, you don't care how peole would look at you. You may enjoy the luxury of "negative packaging" - dressing down instead of dressing up, and yet you are still well respected by people who know you well, wherever you go. That is the privilege and fantastic experience that ordinary people cannot have".
(11) I was offered the best terms in Carrie/Carling during the interview but I declined the offer using other excuses as I did not trust that conglomerate any more. I smelt something fishy for such exaggeration, like what we see the bad guys do in a James Bond film.
(12) A month later, I took another offer from the Jardine Matheson Group that I worked for ten years and quited to create the first DC consultancy company in Hong Kong.
(13) So we are taught not to trust the documents alone, that have to be checked with the information collected by MBWA means.
http://www.tolee.com
[edited 11/27/01 4:59:01 AM]
(1) A bank certificate of financial health may not be true or reliable under certain occasions.
(2) We had one DC dispute case where an applicant was in bad financial situation, oweing an issuing bank million of dollar and was unable to pay back within the next two years. The bank was forced to hide this fact to other creditors. Otherwise they might force the applicant to declare bankruptcy and the issuing bank might get nothing.
(3) So in order to prolong the business life of the applicant with the hope to get back the million dollar loan on <one fine day> (like the name of a famous aria in Puccinni's "Madame Butterfly"), the bank was forced to issue untrue certificate of financial health to enquirers.
(4) Please do not forget that banking is also a business by itself, although we have due diligence duties, yet some bankers may not necessarily play by the rule. We have seen insiders within the banks being prosecuted from time to time for supporting DC frauds in Asia, Europe and elsewhere.
(5) Banks should not look at the static things to evaluate the credit worthiness of their customers. They should practise "MBWA" (Management By Wandering About) and go to the marketplace to visit their customers' offices, talking to their staff, including hearing the gossips and rumours (but with intelligent ears) and doing other <non documentary> activities.
(6) The <Based on documents alone> concept is only good for DC operations and not suitable for credit evaluation.
(7) One time I was invited to attend an interview for a senior position in the Carrie/Carling? Conglomerate (sound like "Guy Ling" in Cantonese, the most popular language of Hong Kong. Would a member from Hong Kong give us the exact English name that we have forgottten). That conglomerate had defaulted most of the big banks in Hong Kong by a very sophisticated plot of fraudulent operations, involving billion of Hong Kong Dollar.
(8) When I took the lift during rush hours in the morning, that stopped at each floor, I observed that there were two glamourously-uniformed, tall and handsome security officers standing on guard the lift entrance on EVERY floor.
(9) I said to myself: "Such glamourous display should cost the conglomerate a lot of money and this is totally unnecessary unless they have a hidden agenda - to impress the members of the public that they are very rich, famous and secured".
(10) I also said to myself: "If you are really rich and famous, you don't care how peole would look at you. You may enjoy the luxury of "negative packaging" - dressing down instead of dressing up, and yet you are still well respected by people who know you well, wherever you go. That is the privilege and fantastic experience that ordinary people cannot have".
(11) I was offered the best terms in Carrie/Carling during the interview but I declined the offer using other excuses as I did not trust that conglomerate any more. I smelt something fishy for such exaggeration, like what we see the bad guys do in a James Bond film.
(12) A month later, I took another offer from the Jardine Matheson Group that I worked for ten years and quited to create the first DC consultancy company in Hong Kong.
(13) So we are taught not to trust the documents alone, that have to be checked with the information collected by MBWA means.
http://www.tolee.com
[edited 11/27/01 4:59:01 AM]
-
hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Disclaimer on the standing of parties.
To add a personal flavor to this discussion, I would like to share my personal experience in banking.
(1) Coming from an educational background which is totally different in flavor, the banking and finance thing was a hell of a challenge for me. I could hardly perceive that studying accountancy, finance and other related banking subjects would not diminish my vigor for literature, presumably opinionated that accountancy has nothing to do with the artistic odour of literary works. But having started studying accountancy, my realization how to delineate the dominating features of a man’s character has been enriched and the appreciation of literature as a reflection of human life did not fade away. Simply because I have discovered that accountancy and finance has much to do with human life as literature do.
As a matter of fact, and since I am well versed in literature, I could not imagine that accountancy and finance would add something to the experience of life we get from literature and that it would reinforce my love to it.
May be I sound romantic but here are my reasons.
Take the concept of depreciation in accountancy as an example and try to apply that concept to your behavior as you do in accounts. If you agree that accounts are subject to depreciation such as fixed assets, except land, because as time passes, its future benefits become an expense and consequently decreases in value, then by the same analogy man’s life could also be subject to depreciation hadn’t he been useful in his environment. Stepping from this hypothesis I believe that accountancy and finance is worth studying. Accountancy is centralized on accumulating and communicating information in two opposite accounts; assets and liabilities. If this is applicable to accounts couldn’t this classification be applicable to man?
Man is born as an asset to his family and perhaps to the society thereafter. But man may turn to be a liability in the sense that his family, employer, society may have to incur “disbursements” in a bid to “amortize” this obligation hadn’t he or she been constructive, efficient and armed with commonsense.
Therefore a static banker could be subject to depreciation as some fixed assets are. A banker may turn to an expense as his future benefit decreases. However, he could be subject to “appreciation” if he increases his efficiency and constructiveness by knowledge, training, exposure to new experiences and ideas, you name it. Hence each banker should learn the concept of how to calculate depreciation in order to evaluate himself and determine his benefit, as it would help him know his real value.
While I do submit to the fact that the proposed equation of “social depreciation of individuals” differ from that of accounting depreciation, both have a principle of identical assessment that of cost and expense. If anyone haven’t realized this then he should start his/her “adjusting entries” before it is too late.
(2) When we were taught to appreciate a poem or a piece of literary work, we were trained to consider amongst other things the setting, the environment, the occasion, the purpose related to that piece of work. A literary critical appreciation of a poem cannot be achieved only by merely reading the words as they “appear on their face” but rather one has to read through and between the lines, consider the shade meanings of the words and many other things. Only then one can excel in literature. Likewise is the business of banking. The financial standing report is critical appreciation of the customer in many aspects. Documents alone are not enough to tell what you want to know. A passport document cannot tell what a person is, and so is a documents from the customer.
To sum my comments up, the approach of MBWA" (Management By Wandering About) referred to by Mr. Lee constitute a well-structured solution to excel in the business of banking.
(1) Coming from an educational background which is totally different in flavor, the banking and finance thing was a hell of a challenge for me. I could hardly perceive that studying accountancy, finance and other related banking subjects would not diminish my vigor for literature, presumably opinionated that accountancy has nothing to do with the artistic odour of literary works. But having started studying accountancy, my realization how to delineate the dominating features of a man’s character has been enriched and the appreciation of literature as a reflection of human life did not fade away. Simply because I have discovered that accountancy and finance has much to do with human life as literature do.
As a matter of fact, and since I am well versed in literature, I could not imagine that accountancy and finance would add something to the experience of life we get from literature and that it would reinforce my love to it.
May be I sound romantic but here are my reasons.
Take the concept of depreciation in accountancy as an example and try to apply that concept to your behavior as you do in accounts. If you agree that accounts are subject to depreciation such as fixed assets, except land, because as time passes, its future benefits become an expense and consequently decreases in value, then by the same analogy man’s life could also be subject to depreciation hadn’t he been useful in his environment. Stepping from this hypothesis I believe that accountancy and finance is worth studying. Accountancy is centralized on accumulating and communicating information in two opposite accounts; assets and liabilities. If this is applicable to accounts couldn’t this classification be applicable to man?
Man is born as an asset to his family and perhaps to the society thereafter. But man may turn to be a liability in the sense that his family, employer, society may have to incur “disbursements” in a bid to “amortize” this obligation hadn’t he or she been constructive, efficient and armed with commonsense.
Therefore a static banker could be subject to depreciation as some fixed assets are. A banker may turn to an expense as his future benefit decreases. However, he could be subject to “appreciation” if he increases his efficiency and constructiveness by knowledge, training, exposure to new experiences and ideas, you name it. Hence each banker should learn the concept of how to calculate depreciation in order to evaluate himself and determine his benefit, as it would help him know his real value.
While I do submit to the fact that the proposed equation of “social depreciation of individuals” differ from that of accounting depreciation, both have a principle of identical assessment that of cost and expense. If anyone haven’t realized this then he should start his/her “adjusting entries” before it is too late.
(2) When we were taught to appreciate a poem or a piece of literary work, we were trained to consider amongst other things the setting, the environment, the occasion, the purpose related to that piece of work. A literary critical appreciation of a poem cannot be achieved only by merely reading the words as they “appear on their face” but rather one has to read through and between the lines, consider the shade meanings of the words and many other things. Only then one can excel in literature. Likewise is the business of banking. The financial standing report is critical appreciation of the customer in many aspects. Documents alone are not enough to tell what you want to know. A passport document cannot tell what a person is, and so is a documents from the customer.
To sum my comments up, the approach of MBWA" (Management By Wandering About) referred to by Mr. Lee constitute a well-structured solution to excel in the business of banking.
-
hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Disclaimer on the standing of parties.
Posted 11/28/01 4:58:39 PM | Edit | Delete
Mr. Lawrence Bacon wrote:
In response to Hatem Shehab, I can probably best answer by using his own words " the report is a culmination of a process of future predicted events based on historical performance of the customer". The fact that this report is the culmination of a process is indicative that it is issued at a moment in time, not that its point of reference is a moment in time as with certain aspects of accountancy. Anybody can predict future events with or without the aid of historical data, but obviously one is more inclined to value such predictions if all known relevant data is incorporated. I reserve omniscience for deity, although some banks (not yours) act as though they are, particularly with regard to their professional financial abilities. All of us are fallible, and human predictions are subject to human fallibility. The best that we can do is to minimize the fallibility of such predictions by basing them on the most comprehensive and accurate information available up to the time such predictions are made. This is why I said that “BANK REPORTS ARE PERHAPS THE BEST INDICATORS WE HAVE GOT AS TO THE FINANCIAL STANDING OF A COMPANY". The fact that it is the best available, does not make it infallible.
I have come across instances over the years of information being withheld from banks or manipulated for commercial reasons. Although my experience of this is limited, I have never come across an instance where a bank discovered such ploys, particularly as they were short term. The professional approach of Hatem Shehab's bank may be evident from his responses, but not all banks are so diligent and unless the applicant is familiar with the bank intended to issue such a report, it may be difficult to assess in advance how reliable or not such a report may be.
Lawrence Bacon
Hatem Shehab wrote in response (I took the liberty to post Mr. Bacon’s response to keep the discussion in logical sequence)
Dear Laurence,
I still have great trust in your commonsense and wise judgement, so please do not take words or phrases in isolation. The financial health certificate although have a date when it was prepared but of course it cannot be considered in the same manner as we consider the balance sheet. To simply, the balance sheet is prepared at a certain point in time, the cash flow statement is prepared at a certain point in time, the income statement is prepared at a certain point in time, however, all these reports are construed differently even regarding the time factor although they all might be prepared on 31/12/01. The balance sheet report major categories and amounts of assets, liabilities, and stockholder’s equity and their interrelationships At A Specific Point In Time. The statement of cash flow reports the cash receipts and outflows in the period of their occurrence, classified as to operating, investing, and financing activities. The cash flow data help explain changes in Consecutive Balance Sheets and supplement the information provided by the income statement. The income statement reports on the performance of the firm, the result of its operating activities. It explains some but not all of the changes in the assets, liabilities, and equity of the firm Between Two Consecutive Balance Sheets.
Now the financial statements are the building blocks of the credit risk analysis but they are not conclusive so what is left:
- Qualitative Analysis of the borrowers; whether the borrower is an individual or public company, the integrity, capacity and moral standing of the company’ management, and the financial economic analysis of the company.
- Quantitative Analysis: which focuses on numerical or financial aspects.
- The basic Cs in credit decisions: character, capacity, capital, condition and collateral.
- Evaluation of the financial, operational and transactional performance of the customer: trends in sales and earnings, profit margin, interim losses, fixed price contracts, alternations in industry patterns or structures, impact of international political and economic trends, labor retaliations, cash draining subsidiaries, seasonal line cleanup, lingering overdraft excesses, repayment schedules, long terms financed with short term facilities, etc.
Therefore, for credit analysis all the above building blocks should be considered as one intergraded analysis to achieve meaningful results. Each building block supplements the other to enable “reading between the lines” of the qualitative data, and getting behind the numbers “in the financial analysis.” The outcome is the credit scoring for the customer and the health or infection report. This is what we mean by culmination. Of course the report encompasses a period of time and not a specific point in time.
Mr. Lawrence, the credit analysis constitutes a major portion of the banks risk management and these criterions stated above are considered educational to every bank employee striving to join the corporate department. It is not restricted to a particular bank. Personally I have worked for four banks, two of them are multinational and reputed. I can tell you that three of them exercise a diligent credit policy, the fourth did not and the end was a take over. Therefore if a given bank does not exercise these procedures well, it does that at its peril.
EXPOSURE TO EXPERINCE FROM IRLAND
The best thing is to give you insights from your country in order to facilitate our points of understanding since you believe that you have never encountered any case of rejection of financials by banks, or that the banks you encountered did not discover ploys in financials.
- The Bank Of Ireland model of Credit Risk Management:
I had the privilege of being exposed to an outstanding credit risk management model initiated by The Bank of Ireland. The Bank of Ireland have developed a 5-point grade scale and 7 point grade scale, they are as follows
Grade 1: minimal credit risk
Grade 2: satisfactory credit risk
Grade 3: vulnerable credit risk
Grade 4: provision account
Grade 5: part or full write-off.
=========================
Grade 1: minimal credit risk
Grade 2: good quality credit risk
Grade 3: acceptable credit risk
Grade 4: watch credit risk
Grade 5: high credit risk Grade
Grade 6: provision account
Grade 7: part or full write-off.
Theses modules are the product of an intensive analysis of deeply preoccupying issues on the part of bank managements and regulators. The two major issues are: credit risk management and credit quality. I can assure you that so great is this focused concentration on credit risk management that it is not surprising if some persons unconnected with banking were to ask – why bankers have become agitated unnecessarily towards credit and lending? Are theses concerns to be taken seriously? And so on.
The answer is that banks realize that single biggest cause of failure worldwide arises from credit problems resulting in substantial loan losses. Banks do not fail because they lack innovation, imagination and marketing skills. Therefore any deficient credit quality will result in substantial loan losses and an erosion of a bank’s capital base. The second important reason for these justified credit qualities strive is that the banks are keen to get the best credit rating from credit ratings agencies. If as you suggest that banks are not aware of withheld information and manipulated information for commercial reasons and still banks did not worry or detect them that does not change the facts about the internal policies and procedure adopted regarding the financial grading of the customer. It may be that these information are not so important to the bank, or there are substantial other things to carry on with the loan or credit facilities. Therefore we cannot generalize if we do not seen from within what is going on. I have a number of cases from Ireland were one can exercise the analysis of financial statements and detect signs of delinquency. If I tell you that I have never encountered any dispute on cargo insurance, does that mean that there are no dispute on cargo insurance? If I tell you that I have never encountered any INCOTERMS related dispute will that mean that there are no disputes as such?
Regrettably, I have a lot of cases where banks have failed to detect the footprints of false financial declarations as well as other banks who have detected those footprints well in advance of any credit decision taken. The cases are in Ireland. This reminds me of the approach of Mr. Lee to the bankers that are not able to detect the footprint of fraud in bills of lading. This does not mean that footprints are not there, the question is whether we are trained to detect them or not?
QUESTIONS
1. CAN A PROFESSIONAL L/C PRACTITIONER DECIDE SINGLE HANDEDLY WHETHER TO ISSUE A SOUND FINANCIAL REPORT TO BE SUBMITTED ALONG WITH THE DOCUMENTS WITH BEING WELL-VERSED IN CREDIT AND IN CLOSE COORDINATION WITH THE CORPORATE DEPARTMENT?
2. ON WHAT GRADE THE REPORT WILL BE ISSUED CONSIDERING THE RULE OF DUE DILIGENCE AND DUE CARE?
The lesson from this lengthy reply is that the financial standing report is a critical one and L/C practitioners should be wary to such report. A simple discussion with corporate and credit risk department may save one’s neck.
regards
Hatem
[edited 11/29/01 9:23:06 PM]
Mr. Lawrence Bacon wrote:
In response to Hatem Shehab, I can probably best answer by using his own words " the report is a culmination of a process of future predicted events based on historical performance of the customer". The fact that this report is the culmination of a process is indicative that it is issued at a moment in time, not that its point of reference is a moment in time as with certain aspects of accountancy. Anybody can predict future events with or without the aid of historical data, but obviously one is more inclined to value such predictions if all known relevant data is incorporated. I reserve omniscience for deity, although some banks (not yours) act as though they are, particularly with regard to their professional financial abilities. All of us are fallible, and human predictions are subject to human fallibility. The best that we can do is to minimize the fallibility of such predictions by basing them on the most comprehensive and accurate information available up to the time such predictions are made. This is why I said that “BANK REPORTS ARE PERHAPS THE BEST INDICATORS WE HAVE GOT AS TO THE FINANCIAL STANDING OF A COMPANY". The fact that it is the best available, does not make it infallible.
I have come across instances over the years of information being withheld from banks or manipulated for commercial reasons. Although my experience of this is limited, I have never come across an instance where a bank discovered such ploys, particularly as they were short term. The professional approach of Hatem Shehab's bank may be evident from his responses, but not all banks are so diligent and unless the applicant is familiar with the bank intended to issue such a report, it may be difficult to assess in advance how reliable or not such a report may be.
Lawrence Bacon
Hatem Shehab wrote in response (I took the liberty to post Mr. Bacon’s response to keep the discussion in logical sequence)
Dear Laurence,
I still have great trust in your commonsense and wise judgement, so please do not take words or phrases in isolation. The financial health certificate although have a date when it was prepared but of course it cannot be considered in the same manner as we consider the balance sheet. To simply, the balance sheet is prepared at a certain point in time, the cash flow statement is prepared at a certain point in time, the income statement is prepared at a certain point in time, however, all these reports are construed differently even regarding the time factor although they all might be prepared on 31/12/01. The balance sheet report major categories and amounts of assets, liabilities, and stockholder’s equity and their interrelationships At A Specific Point In Time. The statement of cash flow reports the cash receipts and outflows in the period of their occurrence, classified as to operating, investing, and financing activities. The cash flow data help explain changes in Consecutive Balance Sheets and supplement the information provided by the income statement. The income statement reports on the performance of the firm, the result of its operating activities. It explains some but not all of the changes in the assets, liabilities, and equity of the firm Between Two Consecutive Balance Sheets.
Now the financial statements are the building blocks of the credit risk analysis but they are not conclusive so what is left:
- Qualitative Analysis of the borrowers; whether the borrower is an individual or public company, the integrity, capacity and moral standing of the company’ management, and the financial economic analysis of the company.
- Quantitative Analysis: which focuses on numerical or financial aspects.
- The basic Cs in credit decisions: character, capacity, capital, condition and collateral.
- Evaluation of the financial, operational and transactional performance of the customer: trends in sales and earnings, profit margin, interim losses, fixed price contracts, alternations in industry patterns or structures, impact of international political and economic trends, labor retaliations, cash draining subsidiaries, seasonal line cleanup, lingering overdraft excesses, repayment schedules, long terms financed with short term facilities, etc.
Therefore, for credit analysis all the above building blocks should be considered as one intergraded analysis to achieve meaningful results. Each building block supplements the other to enable “reading between the lines” of the qualitative data, and getting behind the numbers “in the financial analysis.” The outcome is the credit scoring for the customer and the health or infection report. This is what we mean by culmination. Of course the report encompasses a period of time and not a specific point in time.
Mr. Lawrence, the credit analysis constitutes a major portion of the banks risk management and these criterions stated above are considered educational to every bank employee striving to join the corporate department. It is not restricted to a particular bank. Personally I have worked for four banks, two of them are multinational and reputed. I can tell you that three of them exercise a diligent credit policy, the fourth did not and the end was a take over. Therefore if a given bank does not exercise these procedures well, it does that at its peril.
EXPOSURE TO EXPERINCE FROM IRLAND
The best thing is to give you insights from your country in order to facilitate our points of understanding since you believe that you have never encountered any case of rejection of financials by banks, or that the banks you encountered did not discover ploys in financials.
- The Bank Of Ireland model of Credit Risk Management:
I had the privilege of being exposed to an outstanding credit risk management model initiated by The Bank of Ireland. The Bank of Ireland have developed a 5-point grade scale and 7 point grade scale, they are as follows
Grade 1: minimal credit risk
Grade 2: satisfactory credit risk
Grade 3: vulnerable credit risk
Grade 4: provision account
Grade 5: part or full write-off.
=========================
Grade 1: minimal credit risk
Grade 2: good quality credit risk
Grade 3: acceptable credit risk
Grade 4: watch credit risk
Grade 5: high credit risk Grade
Grade 6: provision account
Grade 7: part or full write-off.
Theses modules are the product of an intensive analysis of deeply preoccupying issues on the part of bank managements and regulators. The two major issues are: credit risk management and credit quality. I can assure you that so great is this focused concentration on credit risk management that it is not surprising if some persons unconnected with banking were to ask – why bankers have become agitated unnecessarily towards credit and lending? Are theses concerns to be taken seriously? And so on.
The answer is that banks realize that single biggest cause of failure worldwide arises from credit problems resulting in substantial loan losses. Banks do not fail because they lack innovation, imagination and marketing skills. Therefore any deficient credit quality will result in substantial loan losses and an erosion of a bank’s capital base. The second important reason for these justified credit qualities strive is that the banks are keen to get the best credit rating from credit ratings agencies. If as you suggest that banks are not aware of withheld information and manipulated information for commercial reasons and still banks did not worry or detect them that does not change the facts about the internal policies and procedure adopted regarding the financial grading of the customer. It may be that these information are not so important to the bank, or there are substantial other things to carry on with the loan or credit facilities. Therefore we cannot generalize if we do not seen from within what is going on. I have a number of cases from Ireland were one can exercise the analysis of financial statements and detect signs of delinquency. If I tell you that I have never encountered any dispute on cargo insurance, does that mean that there are no dispute on cargo insurance? If I tell you that I have never encountered any INCOTERMS related dispute will that mean that there are no disputes as such?
Regrettably, I have a lot of cases where banks have failed to detect the footprints of false financial declarations as well as other banks who have detected those footprints well in advance of any credit decision taken. The cases are in Ireland. This reminds me of the approach of Mr. Lee to the bankers that are not able to detect the footprint of fraud in bills of lading. This does not mean that footprints are not there, the question is whether we are trained to detect them or not?
QUESTIONS
1. CAN A PROFESSIONAL L/C PRACTITIONER DECIDE SINGLE HANDEDLY WHETHER TO ISSUE A SOUND FINANCIAL REPORT TO BE SUBMITTED ALONG WITH THE DOCUMENTS WITH BEING WELL-VERSED IN CREDIT AND IN CLOSE COORDINATION WITH THE CORPORATE DEPARTMENT?
2. ON WHAT GRADE THE REPORT WILL BE ISSUED CONSIDERING THE RULE OF DUE DILIGENCE AND DUE CARE?
The lesson from this lengthy reply is that the financial standing report is a critical one and L/C practitioners should be wary to such report. A simple discussion with corporate and credit risk department may save one’s neck.
regards
Hatem
[edited 11/29/01 9:23:06 PM]
Disclaimer on the standing of parties.
We would like to provide our response to Hatem's two questions as follows:
QUESTIONS
1. CAN A PROFESSIONAL L/C PRACTITIONER DECIDE SINGLE HANDEDLY WHETHER TO ISSUE A SOUND FINANCIAL REPORT TO BE SUBMITTED ALONG WITH THE DOCUMENTS WITH BEING WELL-VERSED IN CREDIT AND IN CLOSE COORDINATION WITH THE CORPORATE DEPARTMENT?
A banker from the DC department is not the right person to issue a financial health certificate because:
(A) A beneficiary customer may deal with other departments as well, such as personal investment (in which a director who signs the indemnity for the import loans extended to a limited company that he owns has a lot of money although his company is operating on loans). So how can a DC banker know about the whole picture particularly personal investment details are confidential matters that enjoy privacy law protection.
(b) The fact that a customer has no money in your bank does not mean that he also has no money in other banks. For example, we have no more than CAD1,000 in Scotia Bank near our office just to ensure that in a snow storm in Toronto, when we cannot drive our cars out due to snow removal in the driveway cannot be done in good time, we may still go to the bank on foot for a short distance, although a very unpleasant and difficult experience, to get some cash for emergency use.
(c) Even if a banker had previously worked in a credit department in the same bank or other banks, he may be "out" due to lack of continuous personal development (CPD) by training and continuously doing the real thing. That is why CDCS requires a banker to sit for re-examination in a period of 3 years. Meanwhile the laws, regulations and trade practices may change and how can a DC banker catch up with all these?
2. ON WHAT GRADE THE REPORT WILL BE ISSUED CONSIDERING THE RULE OF DUE DILIGENCE AND DUE CARE?
We better leave this technical question to be answered by other bankers.
However, we would like to add that bankers traditionally evaluate the financial health of their customers by "counting the bricks" as some bankers in Hong Kong say and do. That means they judge by the value of tangible assets owned by their customers, such as stock and shares of other companies, finished goods, manufacturing plants, warehouses, land, so on and so forth.
With more and more high tech corporations emerging nowadays, those "brick counting " bankers may face a real problem as most internet companies have no bricks to be counted. They live on cash from the public investors by issuing IPO (Initial Public Offering). Then the "brick counting" bankers do not know how to issue the certificate of financial health as high tech corporations count on intangible assets called "prospects". How can a DC banker or any banker know how to interpret, evaluate or predict such "prospects". They have to rely on those special analylists in Wall Street to give them some light. But such information may not be reliable too.
Up to now nobody has yet found out a decisive way to evaluate high tech corporations. If he does, he would become a millionaire.
http://www.tolee.com
[edited 11/30/01 5:12:21 PM]
QUESTIONS
1. CAN A PROFESSIONAL L/C PRACTITIONER DECIDE SINGLE HANDEDLY WHETHER TO ISSUE A SOUND FINANCIAL REPORT TO BE SUBMITTED ALONG WITH THE DOCUMENTS WITH BEING WELL-VERSED IN CREDIT AND IN CLOSE COORDINATION WITH THE CORPORATE DEPARTMENT?
A banker from the DC department is not the right person to issue a financial health certificate because:
(A) A beneficiary customer may deal with other departments as well, such as personal investment (in which a director who signs the indemnity for the import loans extended to a limited company that he owns has a lot of money although his company is operating on loans). So how can a DC banker know about the whole picture particularly personal investment details are confidential matters that enjoy privacy law protection.
(b) The fact that a customer has no money in your bank does not mean that he also has no money in other banks. For example, we have no more than CAD1,000 in Scotia Bank near our office just to ensure that in a snow storm in Toronto, when we cannot drive our cars out due to snow removal in the driveway cannot be done in good time, we may still go to the bank on foot for a short distance, although a very unpleasant and difficult experience, to get some cash for emergency use.
(c) Even if a banker had previously worked in a credit department in the same bank or other banks, he may be "out" due to lack of continuous personal development (CPD) by training and continuously doing the real thing. That is why CDCS requires a banker to sit for re-examination in a period of 3 years. Meanwhile the laws, regulations and trade practices may change and how can a DC banker catch up with all these?
2. ON WHAT GRADE THE REPORT WILL BE ISSUED CONSIDERING THE RULE OF DUE DILIGENCE AND DUE CARE?
We better leave this technical question to be answered by other bankers.
However, we would like to add that bankers traditionally evaluate the financial health of their customers by "counting the bricks" as some bankers in Hong Kong say and do. That means they judge by the value of tangible assets owned by their customers, such as stock and shares of other companies, finished goods, manufacturing plants, warehouses, land, so on and so forth.
With more and more high tech corporations emerging nowadays, those "brick counting " bankers may face a real problem as most internet companies have no bricks to be counted. They live on cash from the public investors by issuing IPO (Initial Public Offering). Then the "brick counting" bankers do not know how to issue the certificate of financial health as high tech corporations count on intangible assets called "prospects". How can a DC banker or any banker know how to interpret, evaluate or predict such "prospects". They have to rely on those special analylists in Wall Street to give them some light. But such information may not be reliable too.
Up to now nobody has yet found out a decisive way to evaluate high tech corporations. If he does, he would become a millionaire.
http://www.tolee.com
[edited 11/30/01 5:12:21 PM]
-
hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Disclaimer on the standing of parties.
Dear Mr. Lee
Thank you for the answers to my questions. Your answers perfectly echoes the famous saying of Robert Burton in his book “Anatomy of Melancholy”. He said “Look Before You Leap.” a token of smartness.
Needless to mention that theses questions are put to help viewers understand the challenge before them due to such report. Of course the second question cannot be answered expect by a highly qualified person in credit. Therefore we appreciate the professionalism of our friend Mr. Lee that he abstained from answering this question. This approach goes with a popular saying in Arabic “Give the bread to the bakery” meaning that if you try to make bread it might be burned or might turn to dumplings but given to the bakery it will sure come our an edible bread.
We hope that bankers in trade finance departments follow this free advice.
[edited 11/30/01 10:12:13 PM]
Thank you for the answers to my questions. Your answers perfectly echoes the famous saying of Robert Burton in his book “Anatomy of Melancholy”. He said “Look Before You Leap.” a token of smartness.
Needless to mention that theses questions are put to help viewers understand the challenge before them due to such report. Of course the second question cannot be answered expect by a highly qualified person in credit. Therefore we appreciate the professionalism of our friend Mr. Lee that he abstained from answering this question. This approach goes with a popular saying in Arabic “Give the bread to the bakery” meaning that if you try to make bread it might be burned or might turn to dumplings but given to the bakery it will sure come our an edible bread.
We hope that bankers in trade finance departments follow this free advice.
[edited 11/30/01 10:12:13 PM]