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An Introduction to Commercial Lending

Lending in a competitive environment


- Banks are no longer unique
- Businesses raise funds from money and
" ,
capital
markets
- Borrow from other financial institutions
- Reducing Risk (Credit "risk)
- Avoldmaklnq very high risk loans
- Evaluate the creditworthiness of borrowers, obtain
collateral, and obtain guarantees
- Transfer credit risk to other parties by selling
standardized loans
- Diversify loan portfolio
I

~ Types of Commercial and Industrial Loans


- Line of credit
- Maturity: One yea~ or less
- Purpose: finance seasonal increases in inventory
and accounts receivable
- Collateral: inventory or accounts receivable
- Revolving
- Term loans
- Bridge loans
. -
- Overdrafts
- Loan commitments
- Examples:
. - Asset sale and repurchase agreements
- Overnight forward purchase
- An irrevocable revolving line of credit
- Commitment fee
- Risk:· Funding or liquidity risk
- Leaslnq
. - Operating
- Financial
- Leveraged
/ Collateral
- Characteristics:
- Standardization
- Durability
- Marketability .
- St':lbility of value
- Types:
- Accounts recelvable
-Inventory

- Floating lien
- Trust receipts .orfloor planning
- Warehouse receipts
- Terminal warehouse
- Field warehouse
- Marketable securities
- Natural Resources
- Oil and gas reserves
- Rea! property and equipment
- Guarantees
The Lending Portfolio Decision
_The amount of bank capital
- The size otthe loan
- The size of the bank
- Economic condition
_The lending policies of the bank
_Bank size and scope of services
- Participations
_Interest rates and credit risk
_~ending and funding strategies
Written Loan Policy
- General policy
- Risk
. - Loan supervision
- Geographic limits
- Credit policies