Assessment of The Borrower

We give below an example to highlight the importance of customer assessment and interview before making a lending decision.

A proposal was received at Central Office for issuance of performance guarantee, Deferred Payment Guarantee and Advance Payment Guarantee for Rs.250/- lacs each, sponsoring the case of a big Road Contractor (highway builder). The proposal involved construction/widening of the highway near Madras for about 20 kms. awarded by a tender. The borrower also had an Italian collaborator. For furnishing the guarantees, the borrower had only 15 days time from the date the proposal was received at Central Office. By way of margin on performance/Deferred Payment/Advance payment guarantees, the branch would get nearly Rs.50 lacs as deposit and 50% of which was already deposited in the current account.

The proposal as received called for urgency but what was conspicuously missing was borrower assessment, credit assessment and evaluation of possible risk factors.

Assuming such a proposal was forecast at the branch level, an interview with the main customer should have been organised with a view to eliciting the following information :

1. Who is the borrower?

2. What is his experience in business ?

3. What are his means and standing ?

4. With which bank he previously carried on Operations ?

5. Names and addresses of his previous bankers.

6. The source from which he had provided a deposit of Rs.25.00 lacs and the means with which he would be providing the margin that may be required on the guarantees.

7. What are the machinery to be purchased and from whom. Are credit reports on the suppliers available ?

8. Anticipated duration of the completion of the whole contract.

9. Availability of skilled personnel (already held and to be employed) and the required materials.

10. Copies of contracts awarded/scrutiny of the terms of the contract and more particularly the penal provisions.

11. What are the securities to be provided ?

None of the preliminaries appear to have been gathered and at the first instance, the proposal was rejected and submitted for reconsideration three times thereafter (unmindful of the expiry of the time limit of 15 days, under pretext of having got extension). The worst that happened was, in pursuit of deposits, the branch did not convey the rejection of the proposal at the first instance and kept on representing. The borrower/borrower's representatives visited Central Office several times and furnished various particulars in piece-meal.

When Central Office rejected the proposal on all the four occasions, the borrower not only brought political pressure and also tried to accuse the bank for having unduly delayed the decision. With lot of unpleasantness and extreme firmness, we turned down the proposal and went on replying to various supporting Governmental agencies and several others who were putting pressure.

The true facts of the above case as gathered at Central Office revealed that,

1. The principal borrower hailed from Punjab far away from Madras and unknown to the local environment.

2. The report obtained on the Italian collaborator revealed that the firm incurred heavy losses and could not carry on business. In pursuit of business, the firm had ventured to other countries which may not have any knowledge of its financial background.

3. The report obtained on the principal borrower revealed that he was connected with a cement scandal at Simla and all the accounts books of the borrower were confiscated by the investigating agency.

4. The most shocking information gathered was that one of the nationalised banks had already filed a suit on the borrower to the extent of Rs.1.5 crores.

5. While the Deferred Payment Guarantee was required for five years, the road contract was to be executed within 18 months, the use and fate of the machinery (to be acquired under the Deferred payment guarantee) elsewhere and the source for repayment of the remaining Deferred Payment guarantee instalments were not indicated.

6. The credit report on the borrower obtained and forwarded at our instance, on close scrutiny at Central Office revealed that the same was issued by the Official Language Cell of a nationalised bank. Our direct correspondence with them in the matter is yet to evoke response and thus proving that the report was a fake one.

From the chain of events narrated above, it should be clear that not only such walk-in business proposals should be subjected to rigorous appraisal techniques but also an useful interview with the customer should be held to elicit information on the most relevant issues listed above. If the sensitive issues were touched upon during the first instance itself, perhaps, the borrower would have been scared away, avoiding the infructuous exercise. The borrower is reported missing.

1. Dialogue or Interview is the most widely used technique for eliciting information. There are several types of interviews, such as between an employer and employee, between a solicitor and client, between a Doctor and Patient and between a Banker and a prospective borrower.

The purpose of the several interviews is different, even though the prime object in each case is to find out information relating to the problem in hand. As it is a dialogue with a purpose, the interviewer in every case should be quite clear on what sort of an information he would like to know and he must be able to recognise it when it is presented.

In any case it is not an aimless hike wherein the interviewer takes the interviewed for a random stroll with a fond hope that something might be found somewhere and at some time. It is a dialogue with a purpose and its success very often depends upon the skill of the interviewer. It is both an art and a measurement technique.

2. Interview technique is generally employed by a Banker in connection with credit appraisal as an instrument of lending technique to draw out information primarily relating to :

(a) About proposed borrower - Fact and Opinion

(b) Proposed project - factual evaluation of resources, skills and their availability.

(c) Assessment whether the borrower merits Bank's confidence.

Soliciting systematic information on the above points, would enable the lending decision to be made in a scientific way. In general terms human attributes can never be quantitatively assessed but must be deduced by a logical process. Interview is the most widely used technique employed to make such a deduction. There are several types of people who call on a Bank seeking financial assistance. These are :

1) A trader.

2) An artisan - a small borrower.

3) A technician.

4) A small scale Industrialist.

5) A medium scale Industrialist.

6) A large scale industry.

Because categories of borrowers function-wise have been differently stated, we may not proceed with the impression that the technique employed is different in different cases. It is not so. The basic ground rules to be followed, are the same.

3. Whatever be the status of the borrower and the information content, analysis and final decision also follow the same pattern. May be in a large venture, more detailed enquiry can be made, which in the case of a small proposal may not be that much necessary. But the principles followed, the basic pattern of an analysis and method of decision making are the same.

We may now detail the Fundamentals of tne technique of interview used in credit appraisal. These are obtention of information on :

1. Who is the borrower - what skill - what character - what ability.

2. How much is needed and why needed?

3. For what purpose it is needed and how used?

4. How long it is needed and what reasonable chances of repayment.

5. What security would be available?

These are some fundamental questions which would enable any Banker to assess a proposal for advance when received. The Banker has to come to some conclusion about the project idea, whether it is really worth exploiting at the present time. He has also to assess whether the proposed borrower is competent and adequate to the task and thirdly the Banker has to find how much money would ultimately be in need and how much of it the borrower is likely to bring himself.

If the object of enquiry is well understood by the interviewer, framing the questions and elicitation of relevant information would be quite easy. Additional information may also be obtained about the market for the product to be manufactured and to ascertain what profits are likely to be forthcoming.

4. We shall start with the question about who is the borrower, what skill, what character and what ability. The primary aim of this part of the dialogue is to find out information about the borrower himself within the time available. The Banker should not adopt a dominant role.but should be able to keep the interviewer at ease and reveal himself by his own efforts.

Significance of the home background, start in life, school work and spare time are important indicators. Details of skills acquired, how and where acquired and how related to the proposal in hand be enquired into. Behaviour as displayed during the interview is the most obvious for evaluation in a standard or test situation.

It would be interesting to have borrower's own assessment about his skill and ability and how he is best suited to execute the proposed venture. Regarding character, if the borrower has come to the Bank duly recommended by another customer, his antecedents be verified through him, otherwise references be obtained and recorded.

5. The borrower should be able to spell out clearly how much money is needed, for what purpose it is needed and how long it is needed. These are all leading questions needed to be asked in relation to the lending technique. The security likely to be made available is also important in spite of the fact that lending has to be made primarily in relation to a potential earning capacity and skill likely to be employed by the potential earner.

6. The most important point on which information has to be found out by the Bank is about the viability of a project which has been offered for financing. The first question is to find out whether the entrepreneur himself has tested the viability, if so, how?

Entrepreneur's views would be interesting to ascertain and verify. Whenever easy credit is advertised to be available, it is usual that the credit grantor would be flooded with proposals, some good, some indifferent and some bad. Bank can finance only good viable proposals as otherwise the money advanced would be lost. As the return flow of lent funds is the first criterion on which a final decision has to be made, viability is always to be judged in the context of certainty of a return flow. Let us consider how to assess the viability of two small projects offered to the Bank for financing.

(i) A play writer eager to stage a play.

(ii) Assistance to a camel driver for transport of vegetables to a nearby city.

Both the proponents have some service to offer. Firstly it has to be found out during the dialogue with the intending borrowers, whether they have undoubted skill in the performance of the service and secondly whether there is a market for the service offered.

In other words, it has to be found through the dialogue what is the intending borrower's idea about the exploitation of the idea at the present time and whether his expertise could be considered adequate and if so how, and whether money could be earned and if so, how assessed. Analysis indicates, about the verification of a demand or skill and the availability of a profit in serving such a demand.

No other assessment technique is likely to give a Bank as much information about the viability and feasibility of any project as a properly conducted interview of dialogue with an intending borrower.