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Banking Operation Management

BANKING OPRATION MANGEMENT

SUBMITTED TO:

SIR SALMAN KHAN

Topic:
Critically analysis different technique of analyzing a business customer by a Bank?

SUBMITTED TO:
Sir. SAYYED ATIF ALI

SUBMITTED BY:
BASHARAT ALI ADNAN ARSHAD MC10257 M.COM (B) MC10226

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Banking Operation Management

ACKNOWLEDGEMENT:
A million thanks to the Almighty, without whose support, there can be no work. I would also like to take this opportunity to extend my appreciation and gratitude to Sir. Sayyed Atif Ali , without their counseling and parallel skills I would have never been able to prepare this project. Finally we owe many thanks for the participation of all group members and their coordination to accomplish the task.

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Banking Operation Management

Table of Contents

Acknowledgement: ............................................................................... 2 Introduction:......................................................................................... 4 Camels Rating: ..................................................................................... 5 Credit Analysis Of The Loan Application: ......................................... 9 Structuring And Documenting Loans:.............................................. 12 Sources Of Information About Loan Customer: ............................. 13 Analyzing Business Loan Application: ............................................. 13 Analysis: .............................................................................................. 19 References:.......................................................................................... 20

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Introduction:
While discussing about the Analysis of Business Customer by Bank , we see that banks are expected to make loan to all qualified customer and there by aid to communities this serve to grow and to improve there living slandered. But it is also risky function because both external factor and internal factors can result in substantial losses for the bank. In order to keep this factor the bank lending function is closely regulated to insure prudent polices and procedure. Bank also control risk in the lending function by setting up written polices and procedure for each bank loan request. While analysis and emulating the business customer bank uses different technique in which they use fives of credit CAMEL rating and credit scoring rating technique. To know about is the customer is creditworthy? For this purpose bank demand different information and document from customer. The most important document is demanded by bank is financial stamen of corporate customer which is use to analysis. Bank uses the different ratios such as liquidity ratio, coverage ratio, and marketability of customer product, control over expenses, leverage ratio, profitability indicators and contingent liabilities. Partnership concerns and corporate entities (both listed and unlisted) are categorized under Corporate Borrower. The system provides unique borrower code to each entity/concern. Member financial institutions are required to report all financial obligations under unique borrower code assigned to each entity/concern. The corporate credit information report contains details of outstanding liabilities (fund and non- fund based), position of overdue, details of litigation, write-offs, recoveries and rescheduling and restructuring.

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Banking Operation Management

CAMELS Rating:
Bank use the CAMELS rating system to rate the corporate business customer, by using this rating he decided about approval of loan. The rating system provides a general framework for evaluating and integrating significant compliance factors in order to assign a consumer compliance rating to each federally regulated business organization. The purpose of the rating system is to reflect in a comprehensive and uniform fashion the nature and extent of an institution's compliance with consumer protection and civil rights statutes and regulations. In addition to serving as a useful tool for summarizing the compliance position of individual institutions, the rating system will also assist the public and Congress in assessing the aggregate compliance posture of regulated financial institutions. It is an evaluation system used to check and assigns numerical grades to a organizations capital adequacy, asset quality, management quality, earnings performance, liquidity management practices, and sensitivity to risk of a organization. During an on-site organization exam, supervisors gather private information, with which to evaluate a organization financial condition and to monitor its compliance with laws and regulatory policies. A key product of such an exam is a supervisory rating of the organization overall condition, commonly referred to as a CAMELS rating. The acronym "CAMEL" refers to the five components of a organization's condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth component, a organization's Sensitivity to market risk was added in 1997; hence the acronym was changed to CAMELS. C - Capital Adequacy A - Asset Quality M - Management Quality E - Earnings L - Liquidity S - Sensitivity to Market Risk

Capital Adequacy:
Every organization is expected to have sufficient capital to address its needs in relation to the risk it undertakes in its operations. The ratio of the capital of a organization in relation to its risk weighted assets must meet the minimum requirements. In capital adequacy we a organization focus mainly on these points.
 Size of the organization  Quality of capital  Volume of interior quality assets

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 Retained earnings  Access to capital markets

Organization's growth experience plans and prospect

Asset Quality:
The term Asset Quality refers to the quality of the assets portfolio of the organization. The primary function of organization is to earn profit. Organization can check the use of assets is in the benefit of business and the check the return on the assets. A sound assets portfolio means a steady income for the organization, apart from adding to the solvency of the organization, and consequently its rating.
 Volume of classifications  Volume of assets  Special mention loans ratio and trends  Strong asset-quality and credit-administration practices.

To ensure asset quality, the Organization has to follow a sound procedure regimen that ensures compliance of all the related norms. Some of the parameters for judging the soundness of a loan account are the components of safety, security, liquidity, purpose, profitability, etc.

Management Quality:
By Management is meant the art and science of accomplishing the goals of the institution by deploying all the necessary resources appropriately. Management includes Planning, Organizing, Staffing, Directing, and Controlling functions. Organization also analysis the management past decision and the effect of this decision. Either the effect of this decision is in favor of organization or not. Planning: Is concerned with drawing up the drawing for the objectives and goals of the organization, and lay the path to reach them. Planning is an all about activity that touches upon all the activities of the Organization. Organizing: Is the next step after planning, and is concerned with putting in place the necessary infrastructure, including human resources to achieve the organization corporate goals.

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Staffing: As the term indicates, is concerned with filling up the various positions in the organization with suitable people. Controlling: Is a function of management that involves establishing a performance standard for the employees and taking suitable steps in regard to the principle of reward and punishment.
y y y y y y y

Compliance with laws and regulations Tendencies towards self dealing Technical competence, leadership of middle and senior management Adequacy and compliance with internal policies Ability to plan and respond to changing circumstances Adequacy of directors Existence and adequacy of quality staff and programmes

Earnings:
The earnings of a organization refer to the net profit made by it. Profit is the difference between income and expenditure. The major sources of income for the organization is sale of goods and services and other income derived from general activities of business. The expenditure of the organization may relate, among other things, to salaries, wages, administrative overheads, rents, rates, taxes, etc. The net surplus that remains after taking care of all the expenses is the net profit.
 Return of assets  Adequacy of provisions for losses  Quality of earnings  Dividend payout ratio in relation to the adequacy of organization capital

Liquidity:
Liquidity is simply the simplicity with which an asset of the organization is converted in cash, in times of need, or its fair value. It is that quality of an asset that enables a Organization to respond to any financial situation requiring urgent infusion of money or money's worth. This quality of the asset ensures that a Organization can cover his loan amount easily.

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 Availability of assets readily convertible to cash without undue loss  Adequacy of liquidity sources compared to present and future needs  Access to money markets  Ability to make safe and sell certain pools of assets  Level of diversification of funding sources ( on and off balance sheet )  Trends and stability of deposits  Management competence to identify, measure, monitor and control liquidity position

Sensitivity to Market Risk:

Market forces are a major reason for shifts in the fortunes of businesses. If the these market forces are in favor of organization then they can give the loan to organization. Market forces generally relate to the changes in Interest Rates, Currency Rates, Commodity Rates, and Stock Prices. Further these changes are inter-related in a complex way, and disturbances in one area are usually accompanied with the same in other areas.
 Ability of management to identify, measure, monitor and control interest rate risk as well as

price and foreign exchange risk where applicable and material to an institution
 Sensitivity of the financial institution's net earnings or the economic value of its capital to

changes in interest rates under various scenarios and stress environments

 Actual or management to identify, measure, monitor and control interest rate risk as well as

price and foreign exchange risk where applicable and material to an institution Explanation of CAMELS composites rating Composite 1 rating Organizations are sound in every respect Composite 2 rating Organizations are fundamentally sound and stable and are in substantial compliance with laws and regulations. Composite 3 rating Organizations exhibit some degree of supervisory concern in one or more of the component areas and require more than normal supervision, which may include enforcement actions. Composite 4 rating Organizations generally exhibit unsafe and unsound practices or conditions and pose a risk to the deposit insurance fund. Composite 5 rating Organizations exhibit extremely unsafe and unsound practices or conditions and pose a significant risk to the deposit insurance fund. Organization failure is highly probable.

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Credit Analysis of the Loan Application:

The division of the bank responsible for analyzing recommendations on the fate of most loan application is the credit department. They mainly focus on Is the borrower creditworthy? they answer this question by using the 5C analysis. The 5 Cs of credit or "5C's of banking" are a common reference to the major elements of a bankers analysis when considering a request for a loan. Namely, these are Cash Flow, Collateral, Capital, Character and Conditions. This study will provide an in-depth picture of each of the 5 Cs of credit or banking to help you understand what your banker needs to understand about your business in order to approve your loan.

Capacity:
This is an evaluation of ability to repay the loan. The financial Institution wants to know how you will repay the funds before it will approve your Loan. Capacity is evaluated by several components. The loan officer must be sure that the customer requesting the credit has the authority to request a loan and the legal standing to sign a binding loan agreement. This customer characteristic is known as the capacity to borrow money. Fro example, in most country a minor cannot legally be held responsible for agreement. Capacity is evaluated by several components, including the following: Payment history Loan officer the past loan payment record of the borrower .In the past, it was more difficult for commercial institutions to determine whether a small company had a good payment history. We can check this through credit rating by PCRA (Pakistan credit rating authority). Contingent sources: For repayment is additional sources of income that can be used to repay a loan. These could include personal assets, savings or checking accounts, and other resources that might be used. Authorizations: In type of the business (company & Partnership) then give the authority to get the loans so bank carefully reviews that.

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Companies: In the resolutions are passing by the board of directors to give the authority to get the loans. So bank get the resolutions copy that is pass in meetings. Partnership: In partnership the partnership deed is made between the partners in which give the authority to any one partner to maintain bank account so bank see the agreement and check the authority who get the loans. Cash Flow This key feature of any loan application, does the borrower have ability to generate enough cash, in from of cash flow, to repay the loan. Banker needs to be certain that your business generates enough cash flow to repay the loan that you are requesting. In order to determine this banker will be looking at your companys historical and projected cash flow and compare that to the companys projected debt service requirements. Generally a customer has following sources to repay the loan and bank also focused on these;  Cash flows generated from sales or income,  The sale or liquidation of assets, or  Funds raised by issuing debt or equity securities There are a variety of credit analysis metrics used by bankers to evaluate this, but a commonly used methodology is the Debt Service Coverage Ratio generally defined as follows: Debt Service Coverage Ratio = EBITDA income taxes unfinanced capital expenditures divided by Projected principal and interest payments over the next 12 months Typically the bank will look at the companys historical ability to service the debt. This means the banker will compare the companys past 3 years free cash flow to projected debt service, as well as the past twelve months to the extent your company is well into its fiscal year. While projected cash flow is important as well, the banker will generally want to see that the companys historical cash flow is sufficient to support the requested debt. Usually projected cash flow figures are higher than historical figures due to expected growth at the company; however banker will view the projected cash flows with disbelief as they will generally entail some level of execution risk. To the extent that the historical cash flow is insufficient and the banker must rely on your projections.

Character:
This is a highly subjective evaluation of a business owner's personal history. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience levels of your employees also will be taken into consideration by [Pick the date]

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lender for giving credit/loan The fact-based assessment involves a review of credit reports on the company, and in the case of smaller companies, the personal credit report of the owner as well. The bank will also communicate with your current and former bankers to determine how you have handled your banking arrangements in the past. The bank may also communicate with your customers and vendors to assess how you have dealt with these business partners in the past. In character we check these things:  Customers personal record  Experiences of other lenders with this customer  Purpose of loan  Credit rating

Collateral:
Does the borrower possess adequate net worth or own enough quality assets to provide adequate support for the loan? The loan officer is particularly sensitive to such features as the age, condition, and degree of specialization of the borrower's assets. In most cases, the bank wants the loan amount to be exceeded by the amount of the companys collateral. The reason the bank is interested in collateral is as a secondary source of repayment of the loan. If the company is unable to generate sufficient cash flow to repay the loan at some point in the future, the bank wants to be comfortable that it will be able to recover its loan by liquidating the collateral and using the proceeds to pay off the loan. First, the banker is interested in only certain asset classes as collateral specifically accounts receivable, inventory, equipment and real estate since in a liquidation scenario, these asset classes can be collected or sold to generate funds to repay the loan. Other asset classes such as goodwill, prepaid amounts, investments, etc. will not be considered by the banker as collateral since in a liquidation scenario, they would not fetch any meaningful amounts. Secondly, the bank will discount or margin the value of the collateral based on historical liquidation values. For example, banks will generally apply margin rates of 80% against accounts receivable, 50% against inventory, 80% against equipment and 75% against real estate. In the case of equipment and real estate collateral the bank will need to have a third party appraisal completed on these assets. The bank will margin the appraised value of these asset classes to determine the amount of the loan, as opposed to using the companys carrying value of these assets on its balance sheet.

Conditions:
The loan officer and credit analyst must be aware of recent trends in the borrower's line of work or industry and how changing economic conditions might affect the loan. To assess industry and economic conditions, most banks maintain files of information-newspaper clippings, magazine articles, and research reports-on the industries represented by their major borrowing customers. Conditions refer to overall evaluation on the proposed business or project. Analysis includes business objectives and purpose of the loan. Banker need to analyze that the loan can help the business to grow and not a burden to the borrower. Other conditions that banker should consider are marketing, technical aspects of the project, economic and overall business conditions such as laws and regulations. This information you get from customers when they apply for a loan. The [Pick the date]

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banker will need your help to identify and understand these key risks, so be prepared to articulate what you see as the primary threats to your business, and how and why you are comfortable with the presence of these risks, and what you are doing to protect the company. The banker will need to understand the drivers of your business, which is equally as important to the banker as understanding the companys financial profile.

Capital:
When it comes to capital, the bank is essentially looking for the owner of the company to have sufficient equity in the company. Capital is important to the bank for two reasons. First, having sufficient equity in the company provides a reduce to withstand a bug in the companys ability to generate cash flow. For example, if the company were to become unprofitable for any reason, it would begin to burn through cash to fund operations. The bank is never interested in lending money to fund a companys losses, so they want to be sure that there is enough equity in the company to weather a storm and to rehabilitate itself. Without sufficient capital, the company could run out of cash and be forced to file for bankruptcy protection. Secondly, when it comes to capital, the bank is looking for the owner to have sufficient skin in the game. The bank wants the owner to be sufficiently invested in the company such that if things were to go wrong, the owner would be motivated to stick by the company and work with the bank during a turnaround. If the owner were to simply hand over the keys to the business, it would clearly leave the bank fewer (and less viable) options on how to obtain repayment of the loan. There is no precise measure or amount of enough capital, but rather it is specific to the situation and the owners financial profile. Commonly, the bank will look at the owners investment in the company relative to their total net worth, and they will compare the amount of the loan to the amount of equity in the company the companys Debt to Equity Ratio. This is a measure of the companys total liabilities to shareholders equity. To summarize, the 5 Cs of credit forms the basis of your bankers analysis as they are considering your request for a loan. The banker needs to be sure that (1) your company generates enough Cash Flow to service the requested debt, (2) there is sufficient Collateral to cover the amount of the loan as a secondary source of repayment should the company fail, (3) there is enough Capital in the company to weather a storm and to ensure the owners commitment to the company, (4) the Conditions surrounding your business do not pose any significant unmitigated risks, and (5) the owners and management of the company are of sound Character, people that can be trusted to honor their commitments in good times and bad.

Structuring and Documenting Loans:

Drafting a loan agreement that meets the borrower's need for funds with a comfortable repayment schedule. Anticipating and accommodating of a customer who may request more or less funds than requested, over a longer or shorter period. Imposing certain restrictions [Pick the date]

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(covenants) on the borrower's activities to protect the banks when these activities could threaten the recovery of bank funds. Specifying the process of recovering the bank's funds - when and where the bank can take action to get its funds returned. A properly structured loan agreement must also protect the bank and those it representsprincipally its depositors and stockholders by imposing certain restriction on the borrowers activities when these activities threaten the recovery of loan.

Sources of Information about Loan Customer:

The bank relies principally on outside information to assess the character, financial position, and collateral of a loan customer. This analysis begins with a review of information supplied by borrower in the loan application. The bank may contact other lenders to determine their experience with this customer. Bank collects this information from following sources:

Consumer Information:
 Local or regional credits bureaus  Customer financial statements  Experience of other lenders

Business Information:
 Business news papers

Government Information:
 Moodys Government manual  Government budget report  Credit rating agencies

General Economic Information:

 Local newspapers  Local chamber of commerce

Analyzing Business Loan Application:

In making business loan application, the banks margin for error is relatively narrow. Many business loans are of such large denomination that the bank itself may be at risk if the loan goes [Pick the date]

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bad. Moreover. Competition for the best business customers reduces the spread between the banks yield on such loans and its cost of funds, labor, taxes, and overhead, which the bank must pay in order to make these loans. For most business credits, the bank must commit roughly $100 in loans and its cost of funds for each $1 earned after all costs, including taxes. This is a modest reward-to-risk ratio, which means that banks need to take special care, particularly with business loans that often carry large denomination and , therefore, large risk exposure. With such a small reward-to-risk ratio, it doesnt take many business loan defaults to seriously erode bank profits. Typically, this requires finding two or three sources of funds the business borrower could draw upon to support the loan. The most common sources of repayment for business loans are the following:  The business borrowers profits or cash flow.  Business assets pledged as collateral behind the loan.  A strong balance sheet with ample amounts of marketable assets and net worth.  Guarantees given by the business, such as drawing on the owners personal property to backstop a business loan. Notice that each of these potential sources of repayment for a loan involves an analysis of customer financial statements now and look at them as a loan involves an analysis of customer financial statements.

Analysis of a business borrowers financial statements:

Analysis of the financial statements of a business borrower, typically, begins when the banks credit analysis department prepares an analysis over time of how the key figures on the borrowers financial statement have changed (usually during the last three, four, f five years). Note that these financial statements include both dollar figures and percentage of total assets(in the case of the balance sheet of the last four years and income statement). These percentage figures often called common-size-ratios, show even more clearly than the dollar figures on each financial statement the most important financial trends experienced by this or any other business loan customer.

Financial ration analysis of a customers financial statements:

Information from balance sheets and income statements is typically supplemented by financial ratio analysis,. By carful selection of items from a borrowers balance sheets and income statement, the loan officer can shed light on such critical areas in business lending as 1. A borrowing customers ability to control expenses; 2. A borrowers operating efficiency in using resources to generate sales and cash flow 3. The marketability of the borrowers product line 4. The coverage that earnings provide over a business firms financing cost 5. The borrowers liquidity position, indicating the availability of ready cash 6. The borrowers track record of profitability or net income 7. The amount of financial leverage(or debt relative to equity capital) a business borrower has taken on 8. Whether a borrower faces significant contingent liabilities that may give rise to substantial claims in the future. [Pick the date]

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I.

The Business Customer s Control over Expenses:

The barometer of quality of a business firm management is show care fully it monitors and controls in its expenses and how well its earning the primary sources of cash to repay the bank loan in most cases are likely to be protected and grow selected financing ratios usually computed by credit analysis to monitor a firm expense control program include the following.         Wages and salaries/ net sales Costs of goods sold/ net sales Overhead expense / net sales Deprivation expenses/ net sales Selling administration and other Interest expense on borrowed Funds/ net sales Expenses net sales

II.

Operating efficiency: measure of a business firms performance effectiveness:

It is also useful to look at a business customer operating efficiency are assets beings utilized to generate sales and cash flow for the firm and how efficiently are sales converted into cash? Important financial ratios here are: Annual cost of goods sold/ average net sales/ net fixed assets Inventory (or inventory turnover ratio) Net sales/ a/c and notes receivable.

Range collection period period=A/R receivable/annual credit sales/360

III.

Market ability of the customer product or service:

In order to generate adequate cash flow to repay a loan the business customer must be able to market goods, services, or skills successfully. A bank can often assess public acceptance of what the business customer has to sell by analyzing such factors as the growth rate of sale revenue, changes in the business customer s share of the available market and gross profit margin GPM define as. GPM=
     

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A closely related and somewhat more refined ration is the net profit margin NPM NPM=
  

 The gross profit margin (GPM) measures both market conditions that are demand for the business customers product or services and how competitive a marketplace the customer faces. A "Marketability Evaluation" basically considers whether the product is "Marketable" within the current and future market, i.e. is the product competitive with other products currently on the market.

IV.

Coverage ration: measuring the adequacy of earnings:

A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period. Coverage refers to the protection afforded creditors of a firm including its bank based on the amount of the firms earning. The best known coverage rations include the following Interest coverage ratio=
    

Coverage of all fixed payments =

     








 

Coverage of all fixed payment=

 

Note that the second of these coverage ratios adjusts for the fact that repayment of the principal of loan are not tax deductible while interest and lease payments are generally tax deductible expenses in the united state. V.

Liquidity indicators for business customers:

The borrowers liquidity position reflects his or her ability to raise cash in timely fashion at reasonable cost, including the ability to meet loan payments when they come due popular measure of liquidity include the following. Current ratio =


 Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business.

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Acid test ratio =

  

Net liquidity ratio= current assets inventories of raw materials of goods current liabilities Net working capital = current assets current liabilities. The concept of working capital is important because it provides a measure of a firms ability to meet its short term debt obligations from its holding from its holding of current assets. Cash is the single most important asset that keeps a construction business operational; all sins are forgivable except one: running out of cash. An individual business firm or government is considered liquid if it can convert assets into cash or borrow immediately spendable funds precisely when cash is needed. Banks are especially sensitive to changes in a business customers liquidity position because it is through the conversion of the liquid assets, including the cash account, that loan repayments usually come.

VI.

Profitability indicators:

The ultimate standard of performance in a market oriented economy in how much net income remains for the owners of a business firm after all expenses except stockholder dividends are charged against revenue. Most loan officers will look at both pretax net income and after tax net incomer to measure the overall financial success of failure of a prospective borrower include. Profitability ratios offer several different measures of the success of the firm at generating profits. The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It is defined as follows: Gross Profit Margin = Sales - Cost of Goods Sold Sales

 Before tax net income + total assets, net worth or total sales  After tax net income + total assets , net worth , or total sales

VII.

The financial leverage factor as a barometer of a business firm s capital structure:

A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ. Any lender of funds is convened about how much debt a borrower has taken on in addition to the loan being sought. The term financial leverage refers to the use of debt in the hope that the borrower can generate earning that exceed the cost of debt there by increasing the potential return to a business firms owners stock holder. Leverage allows a financial institution to increase the potential gains or losses on a [Pick the date]

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position or investment beyond what would be possible through a direct investment of its own funds. There are three types of leveragebalance sheet, economic, and embeddedand no single measure can capture all three dimensions simultaneously Key financial ratios used to analyze any borrowing business credit standing and use of financial leverage are as follows. Leverage ratio=
         

Capitalization ratio =

Debt to sale ratio =

  

VIII.

Contingent liabilities:

A contingent liability is a potential liabilityit depends on a future event occurring or not occurring. Types of contingent liabilities. Usually not shown on customer balance sheets ate other potential claims against the borrower that the loan officer must be aware of such as: 1. Guarantees and warranties behind the business firms product 2. Litigation of pending lawsuits against the firm 3. Unfunded pension liabilities the firm will likely owes its employees in the future 4. Taxes owed but unpaid 5. Limiting regulations These contingent liabilities can turn into actual claims against the firms assets at and news paper future date reducing the funds available to repay a loan. The loan offices best move In this circumstance is first to ask the customer about pending or potential claims against the firms and then to follow up with his own investigation checking court house record public notices and news paper. In this instance it is far better to be safe and well informed than to repose in blissful ignorance.

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Analysis:
At the end we analysis that; bank want to lend his money to customer because it is his main sources of income. Banks also face many challenges during this procedure, to secure his principal amount. Bank control risk in the lending function by setting up written policies and procedures for processing each loan request. The loan policy indicates the lines of authority and decision making within the loan department and the documentation each loan application. Bank considered many factors in deciding whether or not to grant a loan to a borrower. Generally, however, the evaluation of a loan application will focus on six key factors: (1) Character, which goes to the honesty and sincerity of borrower and whether the loan is for a good purpose; (2) Capacity, whether the borrower has the standing necessary to sign a valid loan contract; (3) Collateral, in this bank check the asset of customer that he can pledged against loan; (4) Conditions, and (5) Control, which refers to whether or not the borrower application meets bank loan quality standards. Bank also use CAMEL analysis to rate the customers Capital adequacy, Asset quality, Management Quality, Earnings record, Liquidity record and Sensitivity to market risk. In making business loan application, the banks margin for error is relatively narrow. Many business loans are of such large denomination that the bank itself may be at risk if the loan goes bad. To avoid this risk bank do the detailed analysis of customer financial books. Commonly, bank use these ratios and analysis to check financial statement, Customers ability to control expenses, Operating efficiency in using resources to generate sales and cash flow, Marketability of the borrowers product line, Coverage ratio, Liquidity ratio, Profitability indicators and Leverage ratio. Finally, a sound bank lending program must make provision for the periodic review of all loan until retired. When this loan review process turns up problem loans, they turned over to Workout specialist, who investigate the causes of the problem and work with the borrower to fine the solution that maximizes the bank chances to recover its funds.

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References:
    www.google.com www.googlescholar.com www.sbp.org.pk www.wikicfo.com  www.loanuniverse.com

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