TABLE OF CONTENT
List of Tables and Figures
Chapter One: Introduction
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Purpose and Rationale of the study
1.4 Research Questions
1.5 Research Methodology
1.6 Justification for the Study
1.7 Scope and Limitation of the Study
1.8 Chapter Disposition
Chapter Two: Literature Review
2.2 The Right Credit Standards
2.3 General Principles of Lending
2.4. Banks and Trade Financing
2.5 Credit Standards for Large Personal Lending
2.6 Managing Risk in Lending to Small Corporate Organisation
2.7 General framework of Credit policies of some Banks in Ghana
2.8 Banks’ SME Finance Policy
2.9 Factors affecting Government Policy
2.10 Customers’ Request and Loan Documentation
Chapter Three: Research Methodology
3.2 Research Design
3.3 Population of the Study
3.4 Sampling Procedure
3.5 Research Instrument
3.6 Data Collection Procedure
3.7 Data Analysis
Chapter Four: Data Analysis and Presentation
4.2 Distribution and Analysis of Responses received from Banks’ customers
4.3 Views on Mechanism for Safe Guarding Loans
4.4 Research Findings
Chapter Five: Summary, Conclusions and Recommendations
This study focused on the challenges of Credit Risk Management in Ghanaian Commercial Banks with the searchlight on the operations of Barclays Bank Ghana (BBG), Ghana Commercial Bank (GCB), Zenith Bank Ghana and Merchant Bank Ghana (MBG), all operating in the Accra Business District. The study essentially had the objective of examining the loan application appraisal processes of these banks as well as ascertaining the adequacy of their loan monitoring mechanism.
In conducting the study, the researcher adopted the questionnaire technique as the research instrument to solicit information from both customers and officials of the banks. Purposive sampling technique was employed in selecting officials from the banks whose duties centered on Credit Risk Management. Random sampling technique also helped the researcher in selecting the sample size for the customers of the banks.
Findings made uncovered the fact that poor sales and exchange rate losses, product substitutes due to trade liberalization and inability to enter into the foreign market and account for a chuck of the loan default cases experienced by the banks. It is recommended, among others, that the Government’s information on Venture Capital Trust fund should be made more accessible to the SMEs sectors through official sponsored workshops whilst the capacity and logistics of the Eximguaranty Limited are strengthened to alleviate the credit requirement ‘headaches’ of SMEs. Conclusions drawn centered on the fact that some banks minimize risk factors in credit management by entering into some covenants with borrowers’ under which certain figures and ratios are periodically sent to the banks electronically. Most banks also dispatch their officials to monitor and evaluate the loan disbursement schedules agreed with the customer to minimize bad debt associated with SMEs.
LIST OF TABLES AND FIGURES
Table 3.1: Distribution of Respondents
Table 4.1: Frequency Table on benefits derived from loans
Table 4.2: Frequency Table showing Views on Pre-Requisites for Bank Loan
Table 4.3: Frequency Distribution Table on the suitability of collaterals to guarantee repayment
Table 4.4: Frequency Table showing respondents’ view on reasons for loan default
Table 4.5: Awareness of Alternative Funding Facilities
Table 4.6: Approvals/Declined Rates of Requests Received
Figure 4.1: Pie Chart showing customer representation
Figure 4.2: Pie Chart showing respondents’ views on precautions
against bad debt
Figure 4.3: Bar Graph on Efforts to Minimize Bad Debt
Figure 4.4: Types of Facilities Demanded by SMEs
Figure 4.5: Maximum Amount of Credits Extended SMEs by Banks
illustration not visible in this excerpt
CHAPTER ONE INTRODUCTION
1.1 Background of the Study
The study investigated the credit risk management practices within the financial services environment with special emphasis on the operations of four commercial banks in the Accra Business District namely; Barclays Bank Ghana (BBG), Ghana Commercial Bank (GCB), Zenith Bank Ghana and Merchant Bank Ghana (MBG). Risk involves the threat or probability that an action or event will adversely affect an organizations ability to achieve its objective. Commercial banks globally face various forms of risk in pursuant of their goals and objectives with the commonest being credit risk.
Credit risk is the potential loss by a lender, from the refusal or inability of the borrower/counter party to pay what is owed in full and on time, by way of expected payments. This failure to repay loan results in the lender incurring losses from bad debt which negatively affects their bottom-line, a situation, which may lead to the collapse of banks, withdrawal of license by the regulator as well as tarnishing the reputation of these organizations.
Local banks continue to play the traditional role as providers of credit to the industrial and other sectors of the economy. Civil servants, public servants and other identifiable employee groups also require financial support to procure houses, vehicles and other consumer items. Players in the financial services industry have therefore designed suitable products to meet the taste of all sectors of the economy. The business of providing finance does not lie solely in the court of traditional banks.
International finance groups such as the Japan International Co-operation Agency (JICA) Danish Development Agency (DANIDA) International Finance Corporation (IFC), United States Agency for International Development (USAID) United Kingdom’s Development (DFID) the German GTZ, OPEC fund for Development, Canadian International Development Agency (CIDA), UNDP funds, International Fund for Agric Development (IFAD) have all been disbursing funds towards the growth sectors of the economy using the traditional banks and financial agencies as conduits for accessing these facilities. With the above facilities in place, one should expect business houses and individuals within the economy to enjoy appreciably level of funding from the financial institution thereby performing their expected roles within the economy and repay these facilities as and when payment is due.
Unfortunately, this is not the case; Adu-Mante (2007) notes that banks are really nursing huge bad debts as the result of loan default by borrowers. According to Aryeetey (2002) not much study has been conducted in this area with respect to reasons why customers in Ghana are unable to honour their repayment promises. Most of the literature in this domain is characterized by the context of the Western world and therefore does not adequately address the problem at hand. Some local research is mandatory to help indigenous banks in tackling this canker of bad debt plaguing our banks.
1.2 Statement of the Problem
According to Essien (2005) the failure of most banks to achieve their targeted profits emanate from huge bad debts which results from loan repayment default. What could be the reasons behind such huge bad debts? What credit risk management processes have been established at the various banks to minimise loan repayment reasons behind such huge bad debts? What credit risk management processes have been established at the various banks to minimise loan repayment default? How do the banks appraise loan propositions prior to lending funds? What monitoring mechanisms have been built into the credit risk management practices of the commercial banks to minimise bad debts? What other factors account for loan default by the business communities especially the SMEs? These and other problems constitute the thrust of the study.
1.3 Purpose and Rationale of the study
The purpose of the study is to evaluate the credit risk management mechanisms of commercial banks in Ghana so as to make appropriate recommendations. The specific objectives of the study include:
i. To examine the loan application appraisal processes of commercial banks.
ii. To ascertain the adequacy of loan monitoring mechanism at commercial banks.
iii. To evaluate the adequacy of collateral security in guaranteeing loan repayment.
iv. To analyse the impact of commercial banks credit policy in minimising bad debts.
v. To ascertain the reasons behind the failure of borrowers to repay loans.
1.4 Research Questions
- What items do banks scrutinise on customers’ loan application proposals?
- How do bank monitor its loans?
- What are the main factors that precipitate loan default by customers?
- How effective are collateral securities in ensuring loan repayment?
- What arrangements have been put in place to manage the SME sector of the banks effectively?
- How do the credit policies of the banks help minimise bad debts?
1.5 Research Methodology
Both quantitative and qualitative data were required for the study. Primary data will emanate from customers and officials of the headquarters of four banks and four of their branches in the Accra business district. The questionnaires helped me to find answers to questions like how do bank appraise its loan applications? What strategies have be put in place to ensure monitoring and controlling of drawn down facilities? How adequate are the risk management policies of the bank in fighting financial linkages? How adequate are the collateral security arrangements towards minimizing bad debts? Etc. Secondary data came from seminar papers, financial statement, credit policy manual of these banks, articles and pertinent publications on credit risk management.
Stratified random sampling technique was employed in arriving at required sample for the customers and officials of the banks. However purposive or non-probability sampling technique will enable the investigator to directly approach senior officials of the headquarters for the views of the subject. Basic Statistical Package for Social Sciences (SPSS) was used to analyse data captured from the field and relevant pie charts, graphs, frequency tables etc was featured appropriately.
1.6 Justification for the Study
The study is important in that:
- It will sensitize credit providers to beef up their loan monitoring mechanisms
- It will enable management of the four banks to augment its credit policy
- The Central Bank, being the regulator of the financial services environment will be compelled to make amendments in its bank inspection and monitoring apparatus.
- It will serve as a reference material for research along similar topics.
- The researcher’s knowledge on credit risk management will be deepened.
1.7 Scope and Limitation of the Study
According to their financial statement (2010) the four banks together have two hundred and fifty (250) branches in the country and using only twenty (20) and their headquarters in such a study obviously placed some limitation on the adequacy of information. Owing to secrecy, oath sworn by employees of the bank it was difficult divulging some kind of information which touch on competition to the researcher and this also limited the adequacy of information. As a family person, a student, the researcher sensed his limitation in terms of time and other relevant logistics in conducting a much wider scale study. Notwithstanding the afore-mentioned constraints, the researcher was able to produce a report worth appreciating by all.
1.8 Chapter Disposition
To facilitate reading and comprehension of the report, the study was structured into five distinct chapters.
Chapter one was the transformation of research proposal and featured background information, problem statement, objectives of the study, research questions, significance of the study, research methodology as well scope and limitations of the study.
Chapter two featured the literature review and reviewed publications on credit risk management including loan application appraisal procedures, risk management in export business, risk factor associated with lending to small scale enterprises etc.
Chapter three focused on the details of the research methodology as well as outlined the credit policy of some commercial banks in Ghana.
Chapter four presented the analyzed data together with their interpretation as well as discussion of findings.
Chapter five summarized the study made recommendations and drew very useful conclusions.
CHAPTER TWO LITERATURE REVIEW
This chapter reviews contemporary articles and publications on credit risk management in the financial services environment. It begins by examining theories and concepts associated with right credit standards. It goes on to review general principles on lending as well as discuss specialized financing arrangements prevailing in the export and construction sectors. Credit risk factors relating to the export business are highlighted in addition to examining the trade finance framework within commercial banks.
2.2 The Right Credit Standards
Before examining the techniques of individual credit appraisal, it is worth reflecting on the context in which lending decisions are taken. According to Weston (2000), there is a widely held view that banks never learn from their past mistakes and that no matter what happened in the last recession – whenever that was – the pressures to do new business in better times and the pull of the ‘marketers’ inevitably leads to imprudent lending and more disasters. Adams et al (2002), the right credit standards and a good credit culture in which to apply them are essential for the satisfactory management of credit risk. What does a good credit culture and good credit standards look like?
2.2.1 Credit Culture
Credit culture, according to Kamath et al (2005) can be defined as a bank’s attitude to all matters relating to its management of credit risk. If it is to produce a sound credit risk portfolio it must: Fit with the overall business and organization of the bank. The culture must be capable of delivering the service the bank requires to meet the needs of its customers. It can only do this if it is compatible with the overall business strategy of the bank and is championed by top management of the bank. Because the credit culture must be a balance between taking new risks and also limiting the amount of risk, it is bound to run into opposition of various types. Top management is the only source that can ensure that the culture supports appropriate credit standards, but also is commercial enough not to cost the bank good business.
Solid credit standards, in the view of Rouse (2002), will inevitably cost the bank some business, which in hindsight would have been good. But at the time of the decision 20/20 hindsight is not available. There must be agreement throughout the bank that there is some business it is willing to lose and a consensus as to the criteria to be used in deciding which business to do away with. This policy has to be laid down by top management and should cover the type and level of risk the bank is prepared to take and the reward it expects to earn for given levels of risk, both at the individual lending and portfolio level. Establishing the relative status and authority of the credit risk function in the bank means that there must be clarity over the extent that credit has a veto over the activities of the business developers.
The support of top management in maintaining the agreed authority according to Phelan (1997) is essential as well as the willingness to pay the cost of maintaining the culture. This includes training, analysis, monitoring the quality of decision-takers, computer systems and other elements. However, the cost here cannot simply be calculated in cash terms. It also covers willingness to overcome customer resistance as well as to educate both colleagues and customers as to the benefits of a sound credit structure and ultimately to lose business if the consumer proves uneducable. Being robust enough not to be affected by economic cycles, a work culture that changes in responses to different economic conditions is a weak one.
In the view of Gallinger and Ifflander (2002), credit standards convert the culture into actions. They must take account of the nature of the bank’s business, its structure and the quality and training of staff involved in credit decisions.
Standards include factors such as the depth of analysis required and how far this is adapted to the needs of the borrower. There is a trade off to be made between a wish to understand all aspects of a proposition and cost. How far facilities are to be standardized and how far they are to be tailored to customers individual needs; all are important in creating sustainable credit standards. Moreover, Santomero (1995) says structuring facilities to protect the bank should be done in such a way and as far as possible that benefits eventually accrues to the customer as well. A repayment schedule for a term loan according to Dyer (1995) should match customer cash flow, not just meet some predetermined arbitrary benchmark.
Setting standards also means recognizing how far customer sensibilities are going to be balanced against the bank’s need to protect itself against loss. For example, when a customer’s resistance to giving or improving security or providing information is going to be allowed, then there is the need to educate the customer so as to build their capacity to be able to understand the issues at stake. In creating sound credit standards, Andrew and Victor (2003) believe that it is important to include a proper degree of monitoring and control. The point of monitoring according to Hester and Pierce (2002) is to identify deterioration as soon as possible and to take constructive remedial action. Its effectiveness depends not only on the ability to spot deterioration, but also the quality of the reaction. It is as important to avoid a panic reaction as a complacent one.
Wee and Lee (1995), are of the opinion that credit standards need to be sustained across the economic cycle. They should not be relaxed in good times or over-tightened in bad. In general, companies look better at the top of the cycle and weaker at the bottom than they really are. Therefore logically, monitoring needs to be most strictly applied as the cycle reaches its peak; but this is just the time when companies are tending to seek to drop or weaken covenants as they flex their muscles in the more competitive market place as far as lenders are concerned. The temptation for banks to look at the favorable surface factors and ignore the longer-term risks is greatest, as is the pressure not to lose ‘good business’.
Mial and Smith (2004) have noted that to succumb to this pressure, as banks historically have, is to sow the seeds of losses in the next recession. The losses in recession reflect the mistakes banks make during booms. Conversely, at the bottom of a recession, Gentry (2004) believes that survival can be the best proof of management quality and the ultimate robustness of a business that there is. Companies are likely to be at their most chastened by their recent experience and unlikely to be going for over-expansive and risky plans. Even if they do, they have several years of improved economic conditions ahead of them in which they can pay off their borrowings and get away with all but the most damaging mistakes
However, this is the time when banks are at their most defensive, chaste rend by their own losses and more likely to be risk averse as opposed to risk aware. This is when the loan conditions are tightened beyond what is reasonable or the banks simply refuse to lend. Sometimes they almost actually add to losses by refusing to support battered but fundamentally sound companies that could recover if only they had sufficient finance. It is difficult, but necessary, to remain objectives.
In the past, lending skills were regarded as essential for all bankers and the most senior members of a bank’s management would have them. Times have changed and the credit function within banks is usually one of the less glamorous places to work. Lending is often regarded as ‘value destroying’ because of the amount of scarce capital it uses and business that generates fees and other non-interest income is seen as more attractive. The problem with this is that customers have a need to borrow. May be the bigger ones access capital markets direct through bond issues or commercial paper, but there is a lot of research to show that the service that most customers – especially business ones- most value from their banker is the willingness to grant credit.
According to Dyer (2004), banks face a genuine dilemma in that if they ignore the market and apply standards rigidly, they will avoid credit losses but will have to lose the good business and market share. This must be balanced against the need to meet shareholder aspirations. Whiles models of risk-adjusted capital are widely used and returns related to them, shareholders contribute actual real money capital and want returns on that. It is hard for banks to sit with a lot of real capital and keep ignoring the demand to leverage it. A strong credit culture can help achieve the right balance. If the bank genuinely understand its customers and has the right sort of relationship with them, Adams (2002) thinks it can choose when to bend standards a little and when to adhere to them, if possible, in the context of a strong customer relationship to persuade even the most macho of customers to see the bank’s point of view.
Relationship banking according to Hollensen (2003) is a two way street and customers will expect support when they need it. But where transactional banking is the norm, the risks are greater in boom time shown the marketers are driving and reasonable protections are being sacrificed to ‘market conditions’. If one wants to get something outside the market in the good times, you need to be prepared to give something back when the customer is in a less strong position. Rouse (2004) admonishes that relationship banking is not a complete panacea against bad debts, but it is likely to make losses less in recession, albeit at the price of not doing as much business in the boom times as some more aggressive transaction getters in other banks.
2.3 General Principles of Lending
In this segment, the ground rules for the credit assessment of individual lending propositions will be considered. ‘Rules’ is perhaps not the right word because Robbins and Stobaugh (2000) indicate that experienced lenders use a mixture of technical knowledge and common sense rather than rules. Each lending case has to be treated on its merits, but Essiem (2005), explains that there are a number of general principles, which should be applied in all cases. This subject will be dealt with under two headings: A philosophy for lending and a methodical approach to appraisal.
2.3.1 A Philosophy for Lending: Art or Science?
According to Dyer (2004), a lender does ‘lend money and does not give it away’. There is a judgment therefore that at some future date repayment will take place. The lender needs to look into the future and ask: ‘will the customer repay by the agreed date?’ there will always be some risk that the customer will be unable to repay, and it is in assessing this risk that the lender needs to demonstrate both skill and judgment. The lender’s objective will be to assess the extent of the risk and to try to reduce the amount of uncertainty that will exist over the prospect of repayment. While there are guidelines to follow, there is no ‘magic formula’. The lender must gather together all the relevant information and then apply his or her skills to making a judgment. Number ‘crunching’ will never be enough, and this is why many experienced lenders describe lending as an ‘art’ rather than a science.
2.3.2 The Professional Approach
It is the conviction of Rouse (2005) that lenders must seek to arrive at an objectives decision. This is not as easy as it sounds as there will always be pressures from customers and elsewhere, for example, the need to meet profit targets that may sway the lender’s judgment. A customer may press for a quick answer when the lender does not feel there is adequate information. The approach of the true professional is to resist outside pressures and to insist on sufficient time and information to understand and evaluate the proposition. It is the lender who is taking the risk and it is not professional to reach the wrong decision.
The professional lender who is confident in his or her ability, according to Jorion (1997) will always apply the, following principles includes: State time to reach decision- detailed financial information takes time to absorb. If possible, it is preferable to get the ‘paperwork’ before the interview, so that it can be assessed and any queries identified; Do not be too proud to ask for a second opinion; some of the smallest lending decision can be the hardest; Get full information from the customer and not make unnecessary assumptions or ‘fill in’ missing detail; Do not take a customer’s statements at face value and ask for evidence that will provide independent corroboration; Distinguish between facts, estimates and opinion when forming a judgment; Think again when the ‘gut reaction’ suggests caution, even though the factual assessment looks satisfactory.
2.3.3 A Methodical Approach to Appraisal
In the views of Havrilesky and Boorman (2001), there are five stages to any analysis of new lending propositions namely introduction of the customer, the application by the customer, review of the application, evaluation, monitoring and control.
2.3.4 Introduction of the Customer
Lenders do not have to do business with people they do not feel comfortable with. The account opening procedures should be such as to establish, as for as possible, that the customer is honest and trustworthy. This is especially important when the customer wishes to borrow at a later stage. Approaches for borrowing from customers of other banks, in the view of Hester and Pierce (2002), merit special caution; why is the approach being made at all? Has the proposal already been rejected by the other bank? If the potential customer ought to have financial fact record, but does not appear to have one, a degree of suspicion is in order.
An important source of new business for most lenders according to Hodgman (2001) is introductions form professional advisers such as accountants and solicitors. This is not to say that a bank is obliged to lend to customers introduced in this way. Indeed, there is no evidence to suggest that such customers are generally of better quality than others. The bank should treat such case on its merits and subject each proposition to an objective assessment. Some introducers try to put pressure on the lender, for example suggesting that further introductions may be dependent on agreement to a specific proposition. The lender, in the view of Fallon (1996) must not succumb to such pressure and needs to avoid relying too heavily on any individual source of new business. A good introducer will respect a lender who shows objectivity, while caving in under pressure will only result in being considered a ‘soft touch’ and generate the introduction of other less attractive prospects.
2.3.5 The Application
This, according to Phelan (1997) can take many forms but should include a plan for repayment by the borrowing and an assessment of the contingencies that might reasonably arise and how the borrower would intend to deal with them. It might be in detailed written form or merely verbal. There are many instances when the lender will have to draw out sufficient further information to enable the risks in the proposition to be fully assessed.
2.3.6 Review of the Application
At this stage, Dyer (2002) recommends that all the relevant information that is required need to be tested and other data sought if necessary. Either formally or informally the lender applies what are generally known as the canon of good lending. The main areas common to all lending propositions are examined in some detail. It is sometimes difficult to remember all the points to be covered during an interview and many lenders use a mnemonic as a check list. There are a number of mnemonics in common use, but the most prevalent are probably CCCPARTS (Character, Capital, Capability, Purpose, Amount, Repayment, Terms, and Security) PARSER (Persons, Amount, Repayment, Security, Expediency, remuneration) and CAMPARI which is used by two of the major clearing banks, is probably the most popular of the mnemonics and is the one described in detail here. It stands for: Character, Ability, Margin, Purpose, Amount, Repayment, Insurance (Security).
Saunders and (1996), explains that although some might claim otherwise, it is virtually impossible to assess an individual’s character after just one meeting. It is an extremely difficult area but a vital one to get right. Facts, not opinion, are crucial, e.g. How reliable is the customer’s word as regards the details for the proposition and the promise or repayment? Does the customer make exaggerated claims that are far too optimistic or is a more modest and reasonable approach adopted; is the customer’s tract record good? Was there any previous borrowing, and if so, was it repaid without trouble. If the customer is new, why are we being approached? Can bank statements be seen to assess the conduct of the account?
This aspect relates to the borrowers’ ability in managing financial affairs and is similar to character as far as personal customers are concerned. Further points in respect of business customers, according to Marshal and Siegel (1996) would include: Is there a good spread of skill and experience among the management team in, for example, production, marketing and finance, Does the management team hold relevant professional qualifications? Are they committed to making the company successful? Where the finance is earmarked for a specific area of activity, do they have the necessary experience in that area?
Agreement should be reached at the outset with the borrower in respect of interest margin, commissions and other relevant fees. The interest margin, according to Allen and Santomero (1997), will be a reflection of the risk involved in the lending, while commission and other fees will be determined by the amount and complexity of the work involved. It should never be forgotten that banks are in business to make profits and to give shareholders a fair return on their capital.
The lender will want to verify that the purpose is acceptable. Perhaps the facility would not be in the customer’s best interest. According to Edward and Millet (2002), customers do tend to overlook problems in their optimism and, if the bank can bring a degree of realism to the proposition at the outset, it may be more beneficial to the customer than agreeing to the requested advance.
Dyer (2004), notes that this is important to verify whether the customer is asking for either too much or too little. There are dangers in both and it is important, therefore, to establish that the amount requested is correct and that all incidental expenses have been considered. The good borrower will have allowed for contingencies. The amount requested should be in proportion to the customer’s own resources and contribution. A reasonable contribution from the borrower shows commitment and a buffer is provided by the customer’s stake should problems arise.
The real risk in lending, in the view of Rouse (2005) is to be found in the assessment of the repayment proposals. It is important that the source of repayment is made clear from the outset and the lender must establish the degree of certainty that the promised funds will be received. Where the source of repayment is income/cash-flow, the lender will need projections to ensure that there are surplus fund to cover repayment after meeting other commitments.
Ideally, the canons of lending in the view of Berger and Udell (1995) should be satisfied irrespective of available security, but security is often considered necessary in case the repayment proposals fail to materialize. It is vital that the provider of security, especially third party security, understands fully the consequences of charging it to the bank. It is equally important that no advance is made until security procedures have been completed, or are at least at a stage where completion can take place without the need to involve the borrower any further.
2.4 Banks and Trade Financing
Historically; banks have been involved in a single step in international trade transaction such as actions providing a loan or letter of credit. However, as financing has become an integral part of many trade transactions, banks – especially major money central banks – have evolved as well. According to Sharpiro (2002), they have gone from financing individual trade deals to providing comprehensive solution to trade needs. Such comprehensive services include combining leasing, and other nonbank financing souse, along with political and economic risk insurance.
2.4.1 Collecting overdue Accounts
Typically, 1% to 3% of a company’s export sales go uncollected. Small business, however, take more risks than do large ones, often selling on terms on terms other than a confirmed letter of credit. One reason is that they are eager to develop a new market opportunity; another reason is that they are not as well versed in the mechanics of foreign sales. Thus, their percentage of uncollected export sales may be higher than that of large companies.
Once an account becomes delinquent, sellers have options: (1) They can try to collect the account themselves; (2) they can hire an attorney who is experienced in international law;
(3) they can engage the services of a collection agency.
The first step is for sellers to attempt to recover the money themselves. Turning the bill over to a collection agency or a lawyer too quickly will hurt the customer relationship. However, after several telephone calls, telexes, and/or personal visits, the firm must decide whether to write the account off or pursue it further. The cost of hiring a high-priced U.S. lawyer, who then contacts an expensive foreign lawyer, is deterrent to following the second option for receivables of less than $100,000. With such a restively small amount, a collection agency usually would be more appropriate. Unlike lawyers, who charge by the hour for their services, regardless of the amount recovered, collection agencies work on a percentage basis. A typical fee is 20% to 25% of the amount collected, but if the claim is more than $25,000 or so, the agency will often negotiate a more favourable rate.
Even with professional help, there are no guarantees of collecting on foreign receivables. This reality puts a premium on checking a customer’s credit before filling an order. But, getting credit information on specific foreign firms is often difficult. One good source of credit information is the U.S. Department of Commerce’s International Trade Administration (ITA). Its Word Data Reports covers nearly 200,000 foreign establishments and can be obtained from district offices of ITA for $75. Other places to check on the creditworthiness of foreign companies and governments are export management companies and the international departments of commercial banks. Also, Dun & Bradstreet International publishes Principal International Business, a book with information on about 50,000 foreign enterprises in 133 countries.
Inadequate credit risk management is likely to lead a credit institution' bankruptcy. There are many techniques of this risk management some of which aimed at early warning models of depreciation loan portfolio (Credit Risk +, CreditPortfolio View, KMV etc.), while, the other part is to monitor the credit risk to the borrowers. The study undertaken proposed a credit scoring model, applied to legal entities, designed to identify their insolvency risk. The model was built based on the results obtained by 35 commercial companies (belonging to industry and production) listed on the Bucharest Stock Exchange, for a period of 3 years, between 2012-2014. Of these companies, 8 are in the default condition, meaning 23% of the sample size considered. The selected indicators express the debt repayment capacity, the profitability and the liquidity of the analyzed entities. The most relevant indicator used into the model was appreciated to be banking debt recovery term. The tests applied have demonstrated the model' validity (graininess principle, the power of discrimination).
- RODEAN Maria-Daciana
(Lucian Blaga University of Sibiu)
- GRIGOROI Lilia
(ASEM, Chisinau, Republica Moldova)
- MINCULETE Georgiana Daniela
(Lucian Blaga University of Sibiu, Romania)
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