We are revisiting this topic which we first treated in three parts in the June 09, 16 and 23 editions of Sunday Punch.
We have received several comments and request for more information, but we had to break the flow to address other readers’ interests in other banking matters outside loans/credits. But now we shall attempt to cover as many grounds as there are issues raised in those comments.
Before we go into the new segments, let’s have a recap of what we discussed in June as follows:
First, I noted that this article is focused on business loan. There is this retail end loans that is gaining ground now. It is called consumer loan and I had promised to treat it in the near future. But because business loan is still predominant and most popular accounting for more than 95 per cent of loan portfolio of our banks, most efforts would still be on it.
I also noted that getting a loan from the banks in Nigeria is not as difficult as most people think, especially those that have issues attempting to do so. The problem is largely that of huge communication gap (knowledge gap) between the lender and the borrower, than unavailability of loanable funds or unwillingness of banks to lend. Also it is not all about borrowers’ shortcomings as has been overstretched in some quarters.
If only we note that banks have excess funds which are ready for lending and at same time the banks’ are not ready to throw away depositors’ money simply because somebody wants loan, the borrower-lender field would become even.
Below are some of the things one must have in mind before going for a bank loan:
First, the bank has a duty to protect itself or its depositors’ funds from any loan that may go bad. Hence the bank will have to examine and appraise any credit facility being requested properly after which the request may be granted or rejected.
On the other hand the prospective loan beneficiary has to be ready and ‘on-point’ regarding general and specific requirements before approaching a bank for loan. This is besides some basic conditions which I had outlined in June that must be met before a customer can apply for loan in the first instance. For instance, opening and operating of current account for about six months. Some banks have recently relaxed this condition for small borrowers, but the account must be satisfactorily operated. That is, deposits and withdrawals must be reasonably stable and regular. Customers must have unquestionable character and good health. Company registration details as well as the business case for the loan and the rationale behind it.
Another key requirement is the company business plan, and business financial statements including an income statement, balance sheet and cash flow statement.
Another vital requirement is the personal statements of assets and liabilities of all the business partners as well as members of the Board of Directors, but this may not be required for small scale businesses.
I also indicated that a satisfactory presentation of all the above does not still qualify an application for loan to be granted automatically.
It is on this note that I will crave your indulgence that we introduce new elements that were not in the June articles, especially in respect of security, popularly and erroneously known as collateral for the loan. Security can either be direct or indirect. Indirect security can appropriately be called collateral.
Security is direct when it is deposited by the customer to secure his own loan account, while collateral security is deposited by another person to secure a customer’s account. For avoidance of misconception we will focus on direct security.
Here we shall be focusing on how to prepare security for the purpose of a bank loan. But before we go straight into that, let’s recap on what security is all about.
Ordinarily and by prudential lending norms, every lending proposition should stand up by itself. By this, the bank would want to ensure that the loan is good or secured in itself without security. So it means the bank manager asks for suitable security from the customer in case the loan should go bad, either, beyond all calculated circumstances.
In this connection it is clear that security is required as a safety net, that is, something to fall back upon should the customer find himself unable to repay the loan due to unforeseen (or otherwise) circumstance.
Invariably, for the bank manager the security is never seen as the source of repayment, but only as something to fall back on if the expected source of repayment fails. That is, something like insurance against unforeseen adverse developments not captured in the loan assessment.
Though many banks believe they can lend based principally on cash flow of the business, both prudence and regulatory requirements compel a healthy security to meet the requirements of a secured lending. Hence, any prospective borrower should better prepare what I call a bankable security if he wishes to get loan from any bank. And how do you do that?
To prepare a bankable security some key requirements are as follows:
Valuation Standard: The security should be easy to value, and usually it is based on market price/ value.
Legal Ownership: Ownership should easily be established, and the security should be easy for the bank to obtain a good legal title.
Cashability: It should be readily marketable or realizable. That is to say the bank should be able to easily convert the security to cash.
Depreciation/Appreciation: It is expected that the security should appreciate in value otherwise its depreciation would be discounted against the loan amount outstanding.
