Unit title:

Financial Institutions Lending

Unit code:

BAN501

Unit description:

This module provides us with an understanding of the liberalization of

the financial sector and its impact on the profitability of banks and
financial sector institutions. The focus of this course is credit analysis
and lending. Lending is not merely an activity restricted to the assets
side of the balance sheet. The lending process must arise from and fit
well into the overall corporate objective of a lending organization and
must integrate the growing range of activities into the mainstream
lending business. Such activities involve analyzing lending strategies,
credit appraisal, risk analysis and lending decisions, while keeping in
mind the broad framework of corporate banking or financial strategy. It
considers specific aspects such as credit/loan analysis, policy aspects,
legal aspects, and special types of credits like consumer loans, real
estate loans, corporate loans, and international loans. It also deals with
issues such as securitization, loan pricing and problem loans. It will
offer students and practitioners a guide from the rudiments of credit
appraisal to advanced levels of decision-making. This will be supported
with examples from businesses to facilitate a better understanding of
the behavior and changes in the financial market. This module will
strongly emphasize on commercial bank lending activities, as a major
player in the banking and finance community.

Unit objectives:

This unit is designed to enable students to:

Knowledge
1. Explain the role and process of financial intermediation in an
economy.
2. Evaluatethetheoryoflendinganditsimplications.
3. Understand the practical aspects of lending to various individuals,
corporations and organizations.
Skills
1. Infer general principles from practical lending situations,
articulating those principles in abstract terms, and re-applying them
in different contexts.
2. Develop and improve analytical and problem-solving skills in
lending.
3. Identify and illustrate the potential conflict between profit and social
responsibility in lending.
Values/Attitudes
1. Appreciate the context and nature of the banker-customer
relationship in lending situations.
2. Exercise discretion in negotiating and communicating efforts in the
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lending processes.
3. Critically evaluate the management of lending practices in the
lending organization.
Unit outcomes:

1. Understand the nature of financial institution lending activities and

credit risk.
2. Apply the principles of good lending in assessing credit propositions
from financial institution customers
3. Conduct credit analysis for the purpose of financial institution
lending
4. Assess, modify and justify loan proposals from borrowers
5. Formulate lending propositions taking into account borrowers
specific financial needs, legal regulation on bank credit and social
responsibility of the lending institutions

Readings:

Recommended texts
1. Reed, E. W., Cotter, R. V. & Gill, E. K. (2005), Commercial
Banking, 10th Edition, Prentice Hall
2. Gup, B. E. & Kolari, J. W. (2005), Commercial Banking: The
Management of Risk, 3rd Edition, Wiley & Sons
3. Sathye, M., Bartle, J., Vincent, M. & Boffey, R. (2003), Credit
Analysis and Lending Management, John Wiley & Sons Australia
4. Weaver, P.M. & Kingsley, C. (2001), Banking and lending practice,
4th Edition., Law Book Co, Sydney, New South Wales

Supplementary readings
1. Rouse, C.N. (2002), Bankers Lending Techniques, 2nd Edition,
CIOB
2. Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
3. Fraser, L.M. & Ormiston, A. (2003), Understanding Financial
Statements, 7th Edition, Prentice Hall
4. Coyle, B., (2000), Corporate Credit Analysis, CIB Publishing
5. Greenbaum, Stuart I. & Thakor, A. (1995), Contemporary financial
intermediation., The Dryden Press
6. Rose, P. (1996), Commercial Bank Management, 3rd Edition, Irwin
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McGraw-Hill
7. Sinkey, J. F. (1998), Commercial Bank Financial Management, 5th
Edition, Prentice-Hall
8. Gray, B. & Cassidy, C. (1997). Credit risk in banking, Reserve
Bank of Australia: Sydney
9. Valentine, T. & Ford, G. (1999), Readings in financial management,
Allen & Unwin: Sydney
10. Shanmugan, B., Turton, C. & Hempel, G. (1992), Bank
management, John Wiley & Sons

Journals
1. Asia Pacific Journal of Management
2. Business Week
3. Far Eastern Economic Review
4. Fortune
5. Forbes
6. Harvard Business Review
7. Journal of Marketing
8. Newsweek
9. Sloan Management Review
10. Time
11. The Economist

TOPICS

Unit contents:

1. Principles of Lending and Lending Basics

Nature of lending and credit risk
Purposes and principles of credit analysis
Sources of information for credit analysis
Process of lending proposals
Readings:
Reed, E. W., Cotter, R. V. & Gill, E. K. (2005), Commercial Banking,
10th Edition, Prentice Hall
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Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank

Lending, Addison-Wesley

2.TypesofCreditFacilitiesandtheirFeatures
Credit lines and customer need
Current account overdraft and revolving line of credit
Term facilities, partially and fully disbursed
Difference between personal and business lending
Business structures
Loan negotiation
Readings:
Sathye, M., Bartle, J., Vincent, M. & Boffey, R. (2003), Credit Analysis
and Lending Management, John Wiley & Sons
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
Ruth, G. E. (1992), Commercial Lending, American Bankers
Association (pp.289-329)

3. Consumer lending
Definition of consumer
Consumer credit legislation
Types of consumer loans
Reading:
Gup, B. E. & Kolari, J. W. (2005), Commercial Banking: The
Management of Risk, 3rd Edition, Wiley & Sons
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley

4.

Real estate lending

Definition of real estate
Real estate legislation
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 Types of real estate loans

Reading:
Gup, B. E. & Kolari, J. W. (2005), Commercial Banking: The
Management of Risk, 3rd Edition, Wiley & Sons
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley

5. Small business lending

Definition of small business
Small business legislation
Types of small business loans, e.g. micro-financing
Reading:
Gup, B. E. & Kolari, J. W. (2005), Commercial Banking: The
Management of Risk, 3rd Edition, Wiley & Sons
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
6. Corporate lending
Definition of corporate business
Corporate business legislation
Types of corporate loans
o Bridging loan
o International bank lending
o Loan syndication
o Project finance
Reading:
Gup, B. E. & Kolari, J. W. (2005), Commercial Banking: The
Management of Risk, 3rd Edition, Wiley & Sons
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
Pang, J. (1988), Financing and Practice of Domestic and International
Trade, Pelanduk Publications Malaysia.
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7. EvaluationofFinancingPropositions
Feasibility of projects and risk analyses
Evaluation of types and amount of financing required
Analysis of off-balance sheet items
Analysis of non-quantitative data
Credit scoring techniques
Viability of repayment scheme
Funds flow analysis
Readings:
Weaver, P.M. & Kingsley, C. (2001), Banking and lending practice, 4th
Edition., Law Book Co, Sydney, New South Wales
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
Siegal, G. & Ramanauskas-Marconi, H. (1989), Behavioral Accounting,
South-Western Publishing Co. (pp. 324-355)
8. Analysis of Financial Information for Lending Propositions
The role and use of financial information
Going concern vs. gone concern
Analysis and interpretation of financial information from
different financial statements
Financialratios analysis
Assessment of financial strengths and weakness of borrowers
for the purpose of bank lending.
Reading:
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
Foster, G. (1986), Financial Statement Analysis, Prentice Hall,
Englewood Cliffs (pp. 573-610)
9. Security and Legal Aspects of Lending
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 Legal aspects
Valuation of securities
Readings:
Weaver, P.M. & Kingsley, C. (2001), Banking and lending practice, 4th
Edition., Law Book Co, Sydney, New South Wales
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
10. Credit risk analysis and portfolio management
Credit risks revisited
Loan portfolio
Industry risk explained
Reading:
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
11.

Monitor and Control of Loan Account

Objectivesandproceduresofmonitor&controlofloanaccount
Loan classification and causes of problem loans.
Indicators of problem loans
Prevention and approaches in handling problem loans

Reading:
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
12. Credit Risk Management
Loan policies of banks
Traditional methods of managing credit risk of loan
portfolios
Credit risk modelling such as Altmans Z-score model and
KMVs model
Credit risk management with the application of securitization
and credit derivatives
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Reading:
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley
13. Marketing of Loans
Marketing strategy
Sales strategy
Product strategy
Portfolio strategy
Reading:
Bourke, P. & Shanmugam, B. (1990), An Introduction to Bank
Lending, Addison-Wesley