Lending decisions.

While making lending decisions banks analyse the customers. They analyse the annual report, the figures during in the year and the company’s future development. So banks evaluate the current and future situation of the customer.

They also discuss the length and the maturity of the loan with the customer. If it is a long-term loan banks have to be sure that the customer can repay this loan. Normally the company must be able to repay the loan from the operating cash flow, the EBIT of the company.

The bank’s decision also depends on its portfolio. Banks finance different sectors in industry and they have different limits for the sectors. And if they overstep this limit with the new customer, they need a new approval for the higher limit for the sector, and they have to decide if it’s OK to increase the credit limit for the sector.

Banks also have a rating for each sector. If they have a sector with a bad rating they normally finance the best companies in this sector.

Sometimes the customer would like to finance different transactions in foreign countries. If banks finance transactions in Eastern Europe or in Asia they look at the country rating and the limit for this country. If banks have no limits for this country they can’t finance it as it’s too dangerous.

Answer the questions:

1) What do banks discuss with the customer?

2) When do banks need a new approval for the higher limit for the sector?

3) What do banks do if they have a sector with a bad rating?