1. RAPPORT BANGLADESH LTD Dhaka-Bangladesh Presentation by Professor Emeritus & Founder Principal, Hailey College of Banking & Finance, University of the Punjab, Lahore Pakistan (2003----), Member Governing Council, International Federation of Accountants (IFAC), New York (1997- 2000), President, South Asian Federation of Accountants (SAFA) (1997), President, Institute of Cost and Management Accountants of Pakistan (1997-2000), President, Association of Management Development Institutions of South Asia (AMDISA) (1993-96), Pro Vice-Chancellor University of the Punjab, Lahore (1994-1996), Founder Director, Institute of Business Administration (IBA), University of the Punjab, Lahore (1973-1996) and senior faculty member of Hailey College of Commerce, University of the Punjab(1965-73) & Senior Faculty members, Hailey College of Commerce, University of the Punjab, Lahore (1965-73) Prof. Dr. Khawaja Amjad Saeed Event Training Program Venue & Date Dhaka, March 10, 2012 Title of Paper CORPORATE LENDING RISK ANALYSIS 1

2. PRESENTATION FRAME Section A: 1.Risk:  Concept  Characteristics  Categories  Types 2.Risk Management Model:  RMMM 3.Risk Assessment:  Environment Management Approach  Organizational Analysis 4.Risk Mitigation:  Characteristics of Successful Banks  Mission Statement  Market Research  Innovation 2

3. PRESENTATION FRAME 5.Seven Cs Analysis: Risk Evaluation 6.NIB: Lending Models in Pakistan 7.Projects Risks:  Risks  Safeguarding Against Project Cost Over Runs  Project Profile Section B: Workshop Exercise, Problem Solving Session and Case Analysis 1.Risk Assessment:  Sensitivity Analysis 2.Financial Analysis Exercise 3.Case Study

4. SECTION: A A-1: RISK 4 Concept: 1.Loss of part or all of the actual. 2.Lower Yield on an investment than expected. 3.“While it is futile to try to eliminate risk and questionable to try to misuse it; it is essential that the risks taken be the right risks” (Peter Drucker). Characteristics: 1.Uncertainly:May or may not happen. 2.Loss: If the risk becomes a reality, losses will occur.

5. A-1: RISK 5 Categories 1.Known:Can be uncovered after: a.Careful evaluation of the project plan. b.Reliable information sources: Lack of documented requirements. Unrealistic project plans. 2.Predictable:Extrapolated from past project experience. 3.Unpredictable: Can occur but are difficult to identify in advance.

6. A-1: RISK 6 Types -Specific -Project Risks: -Budget -Schedules -Personnel -Resource -Customers -Technical Risks: -Design -Implementation -Verification -Maintenance -Market Risk -Management Risk

7. A-2: RISK MANAGEMENT MODEL RMMM 1.Risk Mitigation 2.Risk Monitoring 3.Risk Management 7

8. A-3: RISK ASSESSMENT ENVIRONMENT A: Traditional 1.Internal (4): - Revenue - Expenditure - Finances - Human Resources 2.External (4): - PEST B: Current: Task Orientation 1.Competition 2.Customers 3.Suppliers 4.Distribution Channels 8

9. A-3: RISK ASSESSMENT MANAGEMENT APPROACH 1. Management Controls 1.Vision 2.Mission 3.Objectives 4.Organization 2. Marketing 1.Market Research (+Tools) 2.Sales Trends 3.Sales Promotion 4.Sales Training 5.Sales Controls 6.Sales Force 7.Competition 8.Product (s) 9.Pricing 10.Distribution 9

10. A-3: RISK ASSESSMENT MANAGEMENT APPROACH 3. Manufacturing 1.Plant 2.Equipment & Facilities 3.Plant Operations 4. Production Planning 1.Purchasing 2.Material Controls 3.Production Planning & Control 4.Quality 5.Cost Control 5. Industrial Relations 1 +PR 6. Legal 10

11. A-3: RISK ASSESSMENT ORGANIZATIONAL ANALYSIS Focus 1.Customers-Enthusiastic 2.Performance- Financial 3.People-Inspired Aspects 1.Foundation-Strong 2.Customer -Special 3.Goals-Bold 4.Approach-Simplify, Simplify & Simplify 5.Technology-Your Servant 6.Act -Fast 7.People-Unleash the Power 8.Lead-With Care 11

12. A-4: RISK MITIGATION CHARACTERTICS OF SUCCESSFUL BANKS 12 1.Culture:Open 2.Values:Strong and Shared 3.Performance: Profit 4.Orientation:Customers 5.Products:Investment in New 6.Leadership:Strong and Consistent 7.Recruitment:The Best Persons 8.Investment:In Training and Career Development 9.MIS:Operational 10.Credit Process:Strong and Balanced

13. A-4: RISK MITIGATION MISSION STATEMENT Clear and Concise Statement of: 1.Who we are 2.What we Produce/Serve 3.Market we Serve 4.Philosophical Concerns 5.L.T Objectives 6.Being: -Result Oriented -Specific -Attainable 13

14. A-4: RISK MITIGATION: MARKET RESEARCH 1. Total Market: 1.Increase 2.How Much: - At home - Abroad 2. Share of Market: 1.Maintain 2.Increase 3. Customers: Present & Potential: 1.Continue to buy 2.Who are they 3.Where are they 4.Who takes what 5.Will they continue to need our products or service 6.What do they use these for 7.Competition 8.Obsolescence 14

15. A-4: Risk Mitigation: INNOVATION 1.Product 2.Process 3.Function 4.Inter-Departmental 15

16. A-5: SEVEN (7) Cs ANALYSIS: Risk Evaluation 16 1. One “C” -Collateral 2. Three “Cs” -Collateral -Capacity -Condition 3. Five “Cs” 1.1-3 of 2 above 4.Capital 5.Character 4. Seven “Cs” 1.1-5 of 3 above 6.Country Risk 7.Currency Risk

17. A-6: NIB: LENDING MODES IN PAKISTAN 17 FocusModes A: Lending (2)1.Service Charge 2.Qarde Hasna B: Trade Related (6)1.Mark up 2.Purchase of movable or immovable Property with buy back agreement or otherwise 3.Purchase of trade bills 4.Hire purchase 5.Leasing 6.Development charges C: Investment (4) Total 12 1.Musharka or profit and loss sharing 2.Equity participation 3.PTC and Modarba Certificate Sharing 4.Rent Sharing

18. A-7: PROJECTS: RISKS I: Institutional Factors (10) 1.Final Engineering 2.Concluding Contracts with Consultants 3.Acquiring Right of Way 4.Utilities 5.Procurement Speed of Equipment 6.Funds diverted to other projects 7.Management Consultant Problems 8.Inadequate Supervision 9.Shortage of Local Funds 18

19. A-7: PROJECTS: RISKS II: Technical Factors (7) 1.Uncertainty of Original Engineering Estimates 2.Conservative Engineering Estimates 3.Unforeseen technical problems (Soil, slides, water ----) 4.Faulty Design 5.Inefficient Contractors 6.Disputes & Claims of contractors 7.Change in Specifications (Additional work-----) III: Economic & Political Factors (3) 1.Change in Project Composition 2.Price Increase 3.Labour Shortages & Disputes Total 20 19

20. A-7: PROJECT RISKS SAFEGUARDING AGAINST PROJECT COST OVER RUNS 20 1.Consultants-Careful Selection 2.Consultants-Be Experts and Cost Estimators 3.Contingency Allowance-realistic Estimates 4.Reduce Contractors Fears (Risks) by Proper Explanations in Bidding Documents 5.Supervision of Site-Sound

21. A-7: RISK MITIGATION: PROJECT PROFILE 1. Name and Brief Description 2. Criteria 1.Importance to economy 2.Operationalability 3.Viable Results 4.Size 3. Promoters 1.Names 2.Addresses 3.Financial Position 4. Investment 1.Cost 2.FX 21

22. A-7: RISK MITIGATION: PROJECT PROFILE 5. Available Finances 1.Amount 2.Terms & Conditions 3.Sources 6. Preliminary Assessment 1.Executing Agency 2.Inputs 3.Water Supply 4.Labour Situation 5.Management 6.Production Methods 22

23. A-7: RISK MITIGATION: PROJECT PROFILE 7. Amount Needed 1.Form 2.Amount 3.FX 4.Timing of Utilization 8. Information 1.Sources 9. Remarks 1.Regional Head 2.Aspects: -Financial Status -Technical Acumen -General Reputation of Applicant -Feasibility -Marketability of Products 23

24. SECTION B B-1: RISK ASSESSMENT: SENSITIVITY ANALYSIS 24 Given Data: Taka. 000 1.Estimated Investment (Taka)1,000 2.Desired Rate of Return (%) 20 3.Estimated Units Contributing Normal Value (Number) 500 4.Estimated Variable Cost (Taka)1,000 5.Estimated Fixed Cost (Taka) 800 6.Estimated Revenue at Prevailing Price (Taka)2,000 Required: 1.Visualize several, at least, three sensitivities. 2.Quantify the factors at (1) above. 3.Compute the impact of all the three sensitivity factors. 4.Offer your comments to assess operational risk.

25. B-2: FINANCIAL ANALYSIS EXERCISE 25 1.Nijat Hussain & Co. Ltd has approached you for financial assistance. 2.Three years balance sheets and income statements figures have been made available to you. 3.Required: a.Undertake trend analysis of time series to develop a perspective b.Develop initial thoughts as to what financial policies the company is following in respect of:  Resource Mobilization  Resource Utilization  Protection of Financial Resources:  Risks which the company is facing  Financial Management Problems  Distribution in Terms of Dividends

26. 5.Having built a perspective, undertake financial analysis exercise by computing various ratios: a.Liquidity b.Solvency c.Profitability 6.Prepare credit appraisal report. Write up for discussion is enclosed. B-2: FINANCIAL ANALYSIS EXERCISE 26

27. B-3: CASE STUDY: Bank’s Role: Managerial: Doubling the Profit 27 Jauhar Brothers, manufacturers of all metal garden and porch furniture, presented their operating statement as of June 30, 2011 the result of six months operations. Sales TAKA Taka 525,000 Cost of Goods Sold: Variable Expenses: Materials Labour Superintendence Heat, Light, Power 52,500 70,750 21,000 5,250 Rs. 149,500

28. Fixed Expenses: Superintendence9,000 Heat, Light, Power3,000 Depreciation6,000 Repairs to Building7,50025,500 Cost of Goods Sold175,000 Gross Profit350,000 Selling and Administrative Expenses: Variable Expenses: Commission105,000 Advertising5,250 110,250 Fixed Expenses: Officers Salaries30,000 Advertising30,000 Office Salaries72,000 Miscellaneous Expenses30,000162,000 Total Selling and Administrative Expenses272,250 Net profitTaka77,750 B-3: CASE STUDY: Bank’s Role: Managerial: Doubling the Profit

29. 29 Based on discussions held, it transpired that the above enterprise was operating at 60% of its installed capacity. However based on marketing survey carried out, it was concluded that the enterprise has good market potential which could be tapped by increasing its capacity to 85%. Accordingly the bank has been approached to finance the expansion plan which will result in almost doubling the profit. Required: The enterprise seeks your guidance in respect of management decisions to be taken to meet the challenge to raise the capacity from 60% to 85%. With ensequential benefits. Suggest a sound managerial plan to achieve the above goal so that the bank can then guide the enterprise to achieve desired results and also pave the way to finance expanding needs. B-3: CASE STUDY: Bank’s Role: Managerial: Doubling the Profit

30. B-3: CASE STUDY 30 1.Guidelines for developing a managerial decision plan to raise the capacity from 60% to 80% are suggested below: 1.Sales: - Assume a constant price. - Can suggest others also. 2.Labour: - Suggest some percentage of sales: 15%. - This will serve as motivational. 3.Superintendence: - Variable: suggest some percentage: 3%. - Fixed suggest some increase: Taka: 8,250. 4.Advertising: - Present fixed and variable amounts are adequate for all volume upto 60%. - Variable rate may be 5% of such increase.

31. B-3: CASE STUDY 31 5.Others: -All other variable rates will keep their same relationship. Required: 1.Compute the effect on: a.Overall profitability results b.Break even point Hint Formula: FC BEP=---------------------- VC 1------------ TR 2.Also undertake stakeholders beneficial impact.

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