Loan Amount Involvement Risk Analysis

The provided report analyzes the risk associated with a loan amount of 30,000,000 for a project valued at 41,000,000. The analysis indicates that almost 70% of the project's establishment cost is being funded by the loan, which may not be a good indication for the bank. The report also suggests that if the same loan amount were applied to the construction firm, the bank should apply strict regulation and monitoring policies to evaluate the construction project.

CREDIT AND LENDING

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................3
QUESTION 3...................................................................................................................................4
QUESTION 4...................................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Credit means to give purchase things at present at pay the price at some future date. In
context of the banking regulation it is defined as to lend money to the parties or client of the
bank after taking into some securities and deposited against that money landed. In the present
report a bank is being advised on whether it should land a loan of $30,000,000 to a construction
company for building a five star hotel near a beach. Detailed report is presented on inherited risk
related with the risk and recommendations are also provided to the bank for the extent of
financial involvement in the proposed project.
QUESTION 1
Background
This paper is presented for fulfilling requirements of the MBA (Chartered Banker)
program Bangor Business School, University of Bangor, UK. The scope of study is to answer
four questions presented in module.
Methodology-
The project is completed by taking into account all the relevant magazines, study packs,
text books, journals and related reliable sources.
CREDIT MEMORANDUM
To: Management Credit Committee
From: Relationship Manager
Date: 12th December 2018
Subject: In Approval for lending loan
Introduction
Loan syndication is to be provided regarding secured construction
loan totalling $30,000,000 for constructing five-star luxury hotel at a beach area distance within
15 minutes ravelling time from Nassau (Bluhm, Overbeck and Wagner, 2016). Cable Beach
Hotel is to be constructed and developer will be local firm Consultancy (PVT) Limited hired on
contract basis. This means that loan will be sanctioned in accordance to performance of
company.
Character and Ability
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The firm is prestigious architects in Nassau and investigation regarding loan is to be
provided whether bank should approve loan or not. The competitive advantage of firm is high
standards and quality of work. The active involvement of developer would be required so as to
develop loan amount in effectual manner.
Purpose and Amount
Main purpose of company is to construct project comprising 253 bed, five-star hotel
located on the beach in effective manner which will enhance customer satisfaction. The
developer has been granted lease to a land by the government (Ongena, Schindele and Vonnák,
2017). The initial rent is $8,560 in the first year, rising to $15,360 in the twentieth year. The
developer has identified good demand of luxury class resort-based hotel and is dominated by 62
% of US travellers. For accomplishing this, amount of loan $30,000,000 is needed. The
financials of company reveals that hotel will have good growth rate. This is evident from the fact
that total revenue will be 17568 in 2019, increased to 21622 in 2020. Followed by it, figure will
reach 22065 in next year and further maximise to 25510 in 2022, The sales will also elevate in
2023 to 29378 and 30931 in next period and will reach to 32389 in 2025. The net income is
steady but it would be difficult bank to provide loan amount as higher construction cost will be
required which will be approximately $41,000,000 purely for construction of Cable Beach Hotel.
Repayment Capacity
The bank facilities are to be served through the operating income. The Debt Service
Coverage ratio of the firm is on an average more than 1.20 and will reach to 1.92 at the end of
2025. Sales are gone up but profitability has not much increased as operating expenses are
incurred in higher manner. Moreover, liquidity position is moderate of firm.
Securities
Bank has different security options and most appropriate one will be chosen when final
approval will be met out (Cingano, Manares and Sette, 2016). It can be analysed that securities
are to be mortgaged so that bank safety may be carried out in a better manner. This will provide
bank with higher safety and in case of default of loan, bank can sell-off mortgaged assets for
recovering amount in the best manner possible. Movable and immovable assets both could be
chosen for supporting the collateral and as a result, security can be attained in a better manner.
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Recommendation and Approval
The recommendation and principle approval can be made in view of;
 Business Reputation and growing sales revenue
 Adequate financials
 Owners commitment New lending opportunity
Subject to;
 Visiting customer Obtaining full details and submitting proposal for final approval
Revenue and Sales Turnover-
The sales revenue is growing at a rapid rate indicating ability of demand for architectural
services and attaining success of enterprise in effective manner. Good business strategies are
adapted by firm in meeting industry challenges.
Profitability-
The profitability of company is steady and is not growing at a rapid rate. This could be
due to economic downturn in the country and increasing competition. Moreover, due to increase
in operating and non-operating expenses, profits are not increased (di Patti and Sette, 2016).
Leverage and gearing-
The Debt Service Coverage ratio should be high showing that firm may be able to attain
loan from the bank as it shows ability of firm in making debt payments in a better manner
(Faleye and Krishnan, 2017). The ratio is increased and average is more than 1.20.
QUESTION 2
a.) For banks, lending covenants are the essential part which is included in loan agreement
documents. Before, sanctioning loan banks will negotiate covenants with borrower which is
known as permanent agreement for the bank where both the parties' lender and borrower tie up in
an agreement in which expectation is followed regarding risk for repayment period. Covenants
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are of two types that is financial and non financial (Immergluck, 2016). In financial agreement,
customer is abided to follow certain financial measures which may be positive or negative.
b.) To cover financial needs through operating cycle of company an overdraft is provided. This
overdraft is helpful for company to meet short term finance needs of the company. When both
the credit and debit side of the overdraft matched perfectly, it measures that overall business
operations of the company are running smoothly. But unbalance overdraft has occurred with
measurement then it measures that company has having problems in developing effective
business operation. This problems may be of liquidity due which is due to bad collection method,
accumulating stocks or operational losses (Aiyar, Calomiris and Wieladek, 2016).
c.) Liquidation is the process adopted by limited liability companies to wind up their business
operation in business market. To wind up process there are both options for companies that
compulsory or voluntary. Following powers are provided to liquidator to start winding up
process of companies which are as follows-
Liquidator will able to sale any property of the company.
Liquidator will also able to prove financial position of the company that bankruptcy, insolvency
or any contributory.
Has power to appoint agent in business organisation to carry functions with him.
d.) For affairs of company, administrator has been appointed by the court (Chen, Hanson and
Stein, 2017). He is known to be a agent of the company where he has to check all business
operations and has to manage and control entire business of the company.
QUESTION 3
A).
For the present case certain items that can be considered form the given facts and figures
of the project data base are:
 The occupancy level of the room in the hotel for a budgeted period of 6 year have shown
a growth of 13% with a hike in the rates of the room by almost $100 which is can be
consider as a good indicator but this not reflate high growths in sales and revenues.
 The raise in the operating revenues as compared to the operating expenses for a period of
6 years is propositional higher (Advanced Liquidity and Funding Risk Management,
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2018). This shows that with increment the profits the organization will infidelity put
effort to control the cost.
 The net operating income in 2019 is expected to get doubled in 2025 which indicated
the hotel will earn a good position in the market in short span of time.
 For the repayment of the loan hotel management have decides a time frame of 10 years
and for this time the bank is required to keep a close watch on the operation and accounts
of the hotel in order to ensure timely repayment of the loan without any default.
 The projected budget of the hotel is depicting good indicators of growth but in spite of
this the occupancy level is not good as expected to be and this is one of the major criteria
oh hotel business, so loan must be advance after taking into consideration this factors of
growth as well.
B) The business plan is required to be made so that firm may be able to perform in accordance to
the same. Moreover, it is important when new borrowing relationship is to be build and current
status of business, set objectives can be attained. It is a useful tool for monitoring actual
performance against planned targets and make corrective action.
Key Objectives
 To provide luxurious five-star hotel with various amenities for maximising satisfaction
level of customers
 To attain desired sales turnover in next six months
Contact Details of key persons
Tom Harris- Hotel Manager
He posses master's degree in the hotel management and has twenty years of experience.
He has good interpersonal skills, communication and high level of managing skills.
George Rosemary- Hotel Accountant
He holds bachelor's degree in accounting and has six yeas of experience. He has good
communication skills and numeracy skills.
Business Background
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The business is engaged in hospitality sector providing luxurious resort-based hotel to
people in effective manner. Luxurious hotels are provided in accordance to growth of company
and customers are satisfied.
Products and Services
The hotel resort-based services are provided by Cable Beach Hotel in providing efficient
services in a better manner. Room services, attached swimming pool and landscaping are
provided by firm to guests.
PESTLE Analysis
Political
 Political instability
 Fiscal policy
Economical
 Rise in inflation rate
 Economic growth
patterns
Social
 Cultural trends
 Demographics
Technological
 Automation
 Research &
Development
Legal
 Changes in laws
 Safety standards
Environmental
 Geographic location
 Changes in climate
Market Segment and Competitors' Analysis
The market segment of first class people so that they may be satisfied in a better way.
Moreover, luxury services will be provided to rich class people for enhancing customer
satisfaction. Competition is required to be analysed so that strategies may be implemented to
overcome challenges.
Distribution channels and Promotion
The distribution channels are available from suppliers for receiving raw materials for
preparing food. Moreover, promotion is required which would be done through social media
marketing, advertising on TV etc.
Financial Performance and Risk Analysis
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Projected Cash flow statement
Particulars 2019 2020
Sales 14000 15000
Total cash inflows 14000 15000
Promotional expenses
Office expenses 4000 4500
Website expenditures 1200 1350
Legal charges 800 1000
Salaries 3500 3600
Telephone expenses 900 1100
Insurance 500 500
10900 12050
Net Cash flow 3100 2950
Opening cash balance 0 3100
Closing cash balance 3100 6050
Mitigation strategies are required to be made so that risks may be reduced up to a major
extent. Moreover, through mitigation, firm may be able to attain uninterrupted operations.
QUESTION 4
A).
The risk related with investment and loaning can not be eliminated at all. For management of
the four major criteria to be taken into account are:
 Identification of the related issue to built an understanding of what could happen if the
loan is given to construction business to build five star luxury hotel and what are the
future risk related with this success, growth and failure.
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 To estimate the probability of the occurrence of what have been determined in the earlier
step.
 Preparation of the plans and them implementing them to mitigate the risk involved with
extending the loan to the hotel and with determining the intensity of the probability of the
occurrence of the risk.
 To establish effective and efficient monitoring and controlling measure to deal with the
potential outcomes of the risk so determined in the earlier stages.
B).
Risk is inevitable as this come along with each and every new plan be it related with
investment, finance of anything else (Definition of 'Risk Management', 2018). This also stay
through the implementation process and do no go away after completion of the project. But the
intensity of the risk involves gets lower down with stages of completions the end its existence
gets negligible. The element that are considered for the management of the risks within
commercial banking are:
 Market and Industry Risk Assessment: the cost structure of the hotel business reflects
that major investment and expenses are incurred for a period on initial 5 years. With
decrease in the cost into major increment is profits is seen in the budgeted financial
statements of the construction project. The implication of the political factors is
determined with implementation new and amendments in exiting regularization of
operation of hotels. Major risk that is associated with climatic and weather changes as
with high tides and lows and risk of cyclones must also be considered.
 Business Risk Assessment: with changes in the marketing policies and change in
preference of the consumers the hotel can face certain backdrop in its operations and
profitability. This can directly by linked with the repayment of the loans and interest
there on. The increment in occupancy percentage is predicted at lower growth. For
raising the rates of rooms in the hotel market penetration stagy is used which is good but
in long term this can not be considered as good policy as regulate client will detect this
easily and involves a risk of loosing reliable and potential clients.
 Assessment of Financial Risk: this risk is related with growth and profitability along
with determination of cost and expenses (Principles for the Management of Credit Risk,
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2018). The net profits are projected to be more than double after considering all expanses
and taxation cost and this reduces the financial risk of repayment of the loan.
 Documentation and Pricing risk: this is a risk related with act of frauds and
misrepresentation of the documents of insurance and provision of enforce ability in the
courts. The legal risk involved here can be defined as clauses for litigation to solve the
dispute and how all the legal proceeding will be carried out.
CONCLUSION
From the above report it can be concluded that landing an amount of 30,000,000 for a
project of 41,000,000 defined an involvement of higher risk. Almost more than 70% cost for
establishment of the project has been planned to be funded from the loan amount which is not a
good indication for the loaner that is the bank. Further it can be articulated that as
recommendation bank is given advice to extent the loan of only 505 of the project cost as the
financial cost will also be incurred by the bank for evaluation and survey to monitor the
construction by the independent firm appointed on behalf of bank. The bank has been given a
suggestion that if same loan amount of as applied by the construction firm, bank must apply
strict regulation and monitoring policies to evaluated the construction project of the five star
hotel.
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REFERENCES
Books and Journals
Aiyar, S., Calomiris, C.W. and Wieladek, T., 2016. How does credit supply respond to monetary
policy and bank minimum capital requirements?. European Economic Review. 82. pp.142-
165.
Bluhm, C., Overbeck, L. and Wagner, C., 2016. Introduction to credit risk modeling. Chapman
and Hall/CRC.
Chen, B. S., Hanson, S. G. and Stein, J. C., 2017. The decline of big-bank lending to small
business: Dynamic impacts on local credit and labor markets (No. w23843). National
Bureau of Economic Research.
Cingano, F., Manaresi, F. and Sette, E., 2016. Does credit crunch investment down? New
evidence on the real effects of the bank-lending channel. The Review of Financial
Studies.29(10). pp.2737-2773.
di Patti, E. B. and Sette, E., 2016. Did the securitization market freeze affect bank lending during
the financial crisis? Evidence from a credit register. Journal of Financial
Intermediation. 25. pp.54-76.
Faleye, O. and Krishnan, K., 2017. Risky lending: Does bank corporate governance
matter?. Journal of Banking & Finance.83.pp.57-69.
Immergluck, D., 2016. Credit to the Community: Community Reinvestment and Fair Lending
Policy in the United States: Community Reinvestment and Fair Lending Policy in the
United States. Routledge.
Ongena, S., Schindele, I. and Vonnák, D., 2017. In lands of foreign currency credit, bank lending
channels run through?.
ONLINE
Advanced Liquidity and Funding Risk Management. 2018. [Online]. Available though
:<https://www.ukfinance.org.uk/training/advanced-liquidity-and-funding-risk-
management-workshop-3/>.
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Definition of 'Risk Management'. 2018. [Online]. Available though
:<https://economictimes.indiatimes.com/definition/risk-management>.
Principles for the Management of Credit Risk. 2018. [PDF]. Available though
:<https://www.bis.org/publ/bcbsc125.pdf>.
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