MBFB-1013

BANKING SYSTEM IN MALAYSIA

TOPIC:

COMERCIAL AND CORPORATE LENDING

THE NAME OF THE LECTURER:

NOR FADILAH BINTI BAHARI

STUDENT NAME AND MATRIX NO:

1. WAHYU AQMA BINTI DAUD (21BB05013)

2. NUR SYAHADA BINTI MAHAT (21BB05020)

SEMESTER SESSION:

SEMESTER 1 2021/2022 (II)

BB05 1A

FACULTY MANAGEMENT AND MUAMALAH

 CONTENTS
1. INTRODUCTION............................................................................................................2

2. CHARATERISTIC OF COMMERCIAL LENDING..................................................3

3. CHARACTERISTIC CORPORATE LENDING..........................................................5

4. TYPE OF COMMERCIAL AND CORPORATE LENDING.....................................6

5. MAIN DIFFERENCES BETWEEN COMMERCIAL AND CORPORATE

LENDING...............................................................................................................................10

6. TABLE OF COMPARISON PARAMETERS COMMERCIAL AND

CORPORATE LENDING.....................................................................................................11

7. DATA LENDING IN MALAYSIA...............................................................................12

8. PROCESS OF LENDING..............................................................................................13

9. CONCLUSION...............................................................................................................15

10. REFRENCES...............................................................................................................16

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1. INTRODUCTION

A commercial loan is a debt-based financing agreement between a company and a

financial institution like a bank. It's usually utilized to cover big capital expenditures and/or
operating costs that the firm wouldn't be able to cover otherwise. Small firms are frequently
denied direct access to bond and stock markets due to high upfront fees and regulatory
barriers. Smaller enterprises, like individuals, must rely on alternative financing products
such as lines of credit, unsecured loans, and term loans.

Commercial loans are given to a range of corporate organizations to help with short-
term finance needs such as operational expenditures or the acquisition of equipment to help
with the process. The loan may be extended in some cases to assist the firm with more
fundamental operating needs, such as payroll finance or the purchase of commodities utilized
in the production and manufacturing process.

These loans sometimes demand a firm to deposit collateral, which is typically in the
form of property, plant, or equipment that the bank can seize if the borrower defaults or files
for bankruptcy. Cash flows produced from future accounts receivables are sometimes used as
collateral for loans. Business real estate mortgages are one type of commercial lending.

Corporate lending is fundamentally the same as personal lending, except that instead
of a bank lending to an individual, it lends to a business. As a result, the sums of money
handled with are often much bigger, and some of the safeguards are slightly different. Asset-
based lending, structured financing, and cash flow lending are some of the numerous types of
corporate lending.

Structured finance refers to a variety of loan types that have been structured to try to
shift risk. One example is trenching, in which various securities are classified into various
categories, allowing various investment groups to determine the risk rating of the loans they
want to purchase. Asset-based securities backed by government notes, credit derivatives,
collateralized fund organizations, and collateralized debt obligations are all used in structured
corporate lending. Each of these has its own sub-classes, and it may get rather complicated,
but the objective is to reduce risk for both the lenders and the consumers who buy the loans.

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2. CHARATERISTIC OF COMMERCIAL LENDING

At first is ownership. Commercial banks can be founded under any type of ownership,
including sole proprietorship, partnership, or corporation. Its membership will be limited to
ten persons if it is constituted as a partnership. If a corporation is founded, it must be
constituted in accordance with the statute of 1994. The finest feature of a commercial bank is
its ownership. It is the bank's first and finest feature.

Second is taking deposit. One of the key characteristics of a commercial bank is that it
accepts people's savings through several sorts of accounts. People can create accounts at their
leisure and deposit the money they have acquired in the bank. Current accounts, savings
accounts, and permanent accounts are the three types of accounts.

Third is encourage to saving. People are more interested in saving as a result of

significant advertising, which is a key aspect of the commercial bank. More saving storage is
obtained as a result of this. It is feasible for the country to create a capital. Encourage saving
is one of a commercial bank's most successful attributes. The quantity of storage has
increased as the appeal of the customer's mind has increased.

Next, creation of medium of exchange. Although the commercial bank does not create
money or currency, it does provide a medium of exchange through Checks, Hundis, Pay
Orders, Traveler Checks, and Certificates, among other things. As a result, the bank's
customers are spared the risk of carrying cash. This is the most significant potential for
business bank clients. As a result, the formation of a medium of trade is becoming
increasingly common.

Fifth is maintain liquidity. It is a characteristic unique to commercial banks. The

depositor has the right to request a return of his money at any time. The bank will always
maintain the liquidity required to satisfy the depositor's demand if the bank so requests. They
hold a portion of the depositor's money as liquidity and invest the remainder in other areas.
All of these efforts are referred to as maintaining liquidity in a commercial bank.

Sixth is management and operation. On the other hand, proceed with caution. All
country's commercial banks are governed by their own set of banking laws and organizational

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norms. If the branch is a bank, it is run under the supervision of a central office. As a result, it
is a commercial bank's management and operating features.

Next, investment and sanction of loan. Investing is the king of increasing your wealth.
Apart from deposits obtained as liquidity, commercial banks save and invest the remainder in
a profitable industry and short-term loans. The bank pays depositors' daily claims using the
liquidity it has set aside. As a result of their investment and lending, commercial banks
prosper. According to the management, the commercial bank has profited from the
investment and loan approval.

Lastly, creation of loan deposits. The bank cannot keep money substantially if it does
not have access to bank lending services. As a result, another of a commercial bank's finest
characteristics is the establishment of loan deposits. Commercial banks offer more than just
short-term loans. One of the most important functions of a commercial bank is to secure the
usage of local currency, currency mobilization, and investment through the generation of
credit money in novel methods.

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3. CHARACTERISTIC CORPORATE LENDING

Firstly, is client. As we know small to medium-sized enterprises and huge conglomerates are
often served by a bank's business banking arm.

Secondly, authority. A company's corporate banking accounts may only be opened when the
board of directors has given its approval. It implies they have to be approved by a formal vote
or a company resolution. Typically, the treasurer of the corporation opens corporate accounts.

After that, is liability. All contents of corporate accounts are the property of the business, not
the individual board members, because companies are recognized as independent legal
entities under the law. It indicates that corporate accounts have a certain level of
independence. It also means that the contents of a company's corporate account are not
accessible to the board of directors' personal creditors.

Next is credit rating. The operation or conduct of the corporate account is recorded in the
company's credit history. It has an impact on the firm's valuation and share prices, as well as
the interest rates on loans given to the company.

Lastly, is Bankers. Corporate banking necessitates a level of experience in the field. As a

result, corporate bankers are handsomely compensated. Some of the world's largest
commercial banks include JP Morgan Chase, Bank of America Merrill Lynch, and Goldman
Sachs.

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4. TYPE OF COMMERCIAL AND CORPORATE LENDING

A commercial loan is that most often thought of as a short-term source of funds for a
business. This allows the business to get the funds it needs to maintain ongoing operations
and to repay the first loan within its specified time period. There are several unique
commercial loans that business owners can take advantage of. Whether looking to purchase
office space or need funds for that next phase in business strategy.

There is the first type of commercial lending that is bank overdraft facility. A bank overdraft
facility refers to the ability to draw funds greater than are available in the company's current
account. The actual size of the facility and the interest to be paid on overdrafts is typically
agreed to prior to sanction. An overdraft facility is considered as a source of short-term
funding as it can be covered with the next deposit. The biggest benefits of bank overdrafts
include lower interest rates as compared to term loans and least documentation.

Second, business line of credit. A business line of credit is a type of commercial loan
that shares many characteristics of a credit card. Instead of getting funds in one upfront lump
sum, we qualify for a maximum amount. It can then draw funds from line of credit as we
need them. The best part about this is that we pay interest only on what we use not for the
maximum amount. It makes this line of credit great for businesses who may occasionally
need funds to cover operating expenses or to purchase equipment as we go.

Third, a term loan is simply a loan provided for business purposes that needs to be
paid back within a specified time frame. it is the most basic kind of loan that banks lend to
business owners. It typically carries a fixed interest rate, monthly or quarterly repayment
schedule and includes a set maturity date. Term loans can be both secure with some collateral
that is provided and unsecured. A secured term loan will usually have a lower interest rate
than an unsecured one. Depending upon the repayment period this loan. This type is divided
into three that is short-term loan where is repayment period less than 1 year.

Besides, medium term loan is Repayment period between 1 to 3 years. Next, long-
term loan is repayment period above 3 years. Some general characteristics of this type of loan

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include a set loan term in which we must repay what we borrowed, which is usually one to
five years. Next, a fixed or variable interest rate. The last is a few restrictions on what the
money can be used for.

Forth, lease finance. Lease financing is a modern financing method that allows
individuals or companies to own and make use of certain assets for medium to long term
financing periods in return for previously set interim payments. The lessor, who is the finance
company, purchases the assets and becomes its legal owner. At the conclusion of the leasing
period, the lessor would have recovered a large portion or all of the initial cost of the
identified asset, in addition to interest earned from the rentals or installments paid by the
lessee. The lessee also has the option to acquire ownership of the identified asset. For
example, paying the final rental or installment, or by bargaining a final purchase price with
the lessor. Throughout the duration of the leasing period, the lessor that is finance company
remains the legal owner of the asset. However, the lessee has control over the asset, and
makes use of it as required.

Fifth, SBA loan. These loans are given by lenders and backed by the Small Business
Administration. The U.S. Small Business Administration (SBA) has several loan programs
that small business owners can apply for. Each SBA program comes with its own set of
intended uses and eligibility requirements. These loans give our business a surge of capital to
use on what we need. The first SBA program is SBA 7(a) loans which is the SBA’s most
common loan program and can be used for anything from real estate, short- and long-term
working capital, refinancing business debt, and supplies. Besides, SBA 504 loans where it is
are designed for businesses that are purchasing major fixed assets, such as an office building,
that will help grow their business. Next, microloans. These loans are smaller with a
maximum size of $50,000 and are meant to help start up and expand small businesses. SBA
loans aren’t actually funded by the SBA themselves. They are guarantee the loan which is the
funds are provided through other parties. For example, we would apply for a 7(a) loan
through local lender who participates in the program, and the SBA would back the loan. A
certified development company would provide an SBA-backed 504 loan, and SBA
microloans are funded through intermediary lenders that partner with the SBA.

Lastly, commercial real estate loan. Real estate loans are for purchasing new business
property. As the name implies, a commercial real estate loan is used to purchase commercial
property. We can use these commercial mortgage loans to buy real estate as business space or

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to buy properties as an investment. Under the umbrella of commercial real estate loans, we’ll
find even more sub-types, including permanent loans, which act as a first mortgage on a
commercial property. Others, like blanket loans, are designed to cover the purchase of
multiple properties. Local commercial lenders can work with us to come up with a loan that
fits our unique business needs.

As you know, a corporate loan it is can either be secured or unsecured. Secured loans
require that we provide collateral. It helps the lender sell the asset we offered to repay the
loan if we fail in this regard. Going for this loan enables we to get lower interest rates and
more extended repayment periods. There are some common types of corporate loans. The
first one is term corporate business loans. This term we can use the available funding from
corporate term loan for anything we want. Either for infusing working capital, purchasing-
renovating machinery or property, buying equipment, or upgrading technology. Interest rates
can either be fixed or floating. However, it is a fixed loan repayment term. It is three years for
a secured corporate loan and up to 15 years for its unsecured variant.

Second, corporate loan against securities. This loan is for those investing in financial
securities like mutual funds, insurance, bonds, and exchange-traded funds or fixed maturity
plans. We pledged the securities we have invested in as collateral against the loan amount.
A loan against securities is an ideal way to make our investments work harder and smarter for
us. We can draw money from the account, and we pay interest only on the loan amount we
use and for the period we use it only. The loan repayment term gets renewed every year. For
example, we are offered a loan against shares of Rs 2 lakhs. Let’s say, you draw Rs 50,000
and deposit the amount back in our account in one month. In this case, we are liable to pay
interest only for one month on Rs 50,000. The amount of loan we are eligible for depends on
the value of the securities we offer as collateral.

Third, an overdraft facility is a type of demand loan that is a loan that the lender may
require to be repaid at any time which is offered by banks to enable a person to withdraw
more money than they have in their account, based on a credit limit determined by the bank.
These facilities allow business owners to debit their accounts below 0. The total overdraft
amount is usually decided by banks, based on what we pledge as collateral to the bank. It
varies depending on the type of security we have pledged. For example, we were to pledge a
property worth RM500,000. We would be able to get up to 50% of what we pledge, which in

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this case would be RM250,000. But the calculation method for an overdraft limit is based
upon the bank’s discretion.

Forth, cash credit facility. A credit facility is a type of loan made in a business or
corporate finance context. It allows the borrowing business to take out money over an
extended period of time rather than reapplying for a loan each time it needs money. In effect,
a credit facility lets a company take out an umbrella loan for generating capital over an
extended period of time. It is a type of corporate loan where we receive money for our
business assets like inventory or receivables. Various types of credit facilities include
revolving loan facilities, committed facilities, letters of credit, and most retail credit accounts.
The amount allowed to withdraw is up to 70% of the value of the asset submitted. And the
repayment term gets renew every 12 months.

Fifth, channel financing. Channel financing is a structured programmed through

which the bank offers short-term working capital facilities to the supply chain stake holders
that is buyer and the supplier. Channel financing is perhaps the latest entry among the types
of corporate loans. Here, we get a chance to strengthen our network of distributors. The loan
ensures that our distributors get the funding required to buy equipment and other items. The
design of the repayment schedule is as per the needs of the borrower. For example, if the
large corporate has to get the supply of raw material from the MSE vendors in a seamless
way, the vendors also want to get the payment on due date so that they may not feel the pinch
of liquidity of funds. Channel financing helps the stake holders to sustain a seamless business
flow by avoiding any difficulties relating to working capital which are mainly delay in getting
the payment from the buyer to the supplier.

Lastly, drop-line overdraft facility. Dropline Overdraft is a financial instrument that

allows a borrower to overdraw cash from his/her current account up to an agreed limit,
wherein the withdrawal limit reduces each month from the sanctioned limit. Individual
lenders even offer drop-line overdraft facility. Here, the lender deposits the loan amount in a
separate account. It is done to ease corporate loan interest rates. We need to pay interest only
for the amount of the loan used where is interest rate is calculated on a daily basis and is

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charged at the end of each month. For example, If the initial tenure of the overdraft facility is
60 months and the original overdraft limit granted is Rs. 10 lakhs, then after 1 month the
operating limit shall automatically be reduced by 10,00,000/60 = Rs. 16,666. This means that
the operating limit available at the end of the first month shall be (10,00,000 – 16,666) = Rs.
9,83,334. This calculation shall proceed for the second month as well and each month further,
up till the last month of repayment tenure.

5. MAIN DIFFERENCES BETWEEN COMMERCIAL AND CORPORATE

LENDING

The most significant differences between corporate and commercial banking from
comparison parameters is primary services. As we know, commercial banks use individuals
and small enterprises can apply for credit through commercial banking, and their financial
requirements are met while corporate lending use major MNCs and large institutions are the
primary clientele of corporate banking. They provide them a loan to start a business and then
charge them interest. Individuals and small companies are the primary consumers of
commercial banking.

Secondly, is about globalization. Only local usage is dealt with in commercial

banking. It doesn't engage with individuals all around the world where as they connect with
clients all around the world, corporate banking accommodates both locally and
internationally.

Thirdly, loan amount. They exclusively deal with individuals and small firms,
commercial banking gives less money or small loans. However, Corporate banking deals with
significant sums of money, and the majority of their clients are large corporations.

Next, about short terms loan, such as one-day loans, to enable large institutions carry
out their day-to-day operations. Commercial banks it does not offer loans for a short period of
time while corporate banks it offers loans for a short period of time.

Lastly, the commission level of a commercial bank is higher than that of a corporate
bank because the level of commission is modest to moderate.

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6. TABLE OF COMPARISON PARAMETERS COMMERCIAL AND
CORPORATE LENDING

Comparison Parameters Commercial Lending Corporate Lending

Primary services Individuals and small Major MNCs and large
enterprises can apply for institutions are the primary
credit through commercial clientele of corporate
banking, and their financial banking. They provide them
requirements are met. a loan to start a business and
then charge them interest.
Globalization Only local usage is dealt As they connect with clients
with in commercial banking. all around the world,
It doesn't engage with corporate banking
individuals all around the accommodates both locally
world. and internationally.
Loan Amount Because they exclusively Corporate banking deals
deal with individuals and with significant sums of
small firms, commercial money, and the majority of
banking gives less money or their clients are large
small loans. corporations.
Short Terms Loan It does not offer loans for a It offers loans for a short
short period of time. period of time.
Commission level When compared to The level of commission is
corporate banks, the modest to moderate.
commission level is
substantial.

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7. DATA LENDING IN MALAYSIA

In March 2021, the Malaysian Bank Lending Rate was estimated to be 3.468 percent per
annum.

This is down from the prior figure of 3.487 percent pay for February 2021.

Malaysia Bank Lending Rate data is updated monthly, with 303 observations from January
1996 to March 2021, average 5.9 percent each year.

In May 1998, the statistics reached an all-time high of 13.540 percent, and in January 2021, it
hit a new low of 3.4 percent.

Malaysia Bank Lending Rate data is reported by CEIC Data and has an active status in CEIC.

The information is organized in Table: Global Economic Monitor by World Trend Plus.
Asia's Bank Lending Rate: Monthly

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8. PROCESS OF LENDING

Firstly, process of pre-qualification. In the loan origination process, this is the first
stage. The potential borrower will be given a list of materials to submit to the lender in order
to be approved for a loan at this point. Here are several examples Voter ID, AADHAR, and
PAN CARD are examples of ID/address proof. Next, salary slips and current employment
information. After that, score of credit. Lastly, statements from the bank and previous loans.
Following the submission of this information to the lending firm, the lender evaluates the
paperwork and issues a pre-approval, enabling the applicant to proceed with the loan
application procedure.

Second is loan application. This is the next step in the loan application procedure. The
borrower completes the loan application at this point. This application may be paper-based at
times, but today's lenders are moving toward an electronic form that eliminates the need for
paper at this step. New technologies make it possible to complete an application online via a
website or a mobile app, and the information gathered may be customized to specific loan
products.

Third, application processing. The credit department receives the application at this
point, and the first thing it does is check it for accuracy, genuineness, and completeness. If all
of the needed fields are not filled out, the application will be returned to the borrower or the
credit analyst, who will contact the borrower to get the missing data. Lenders utilize the Loan
Origination System (LOS) to determine a borrower's creditworthiness. A good LOS will
assist a lender in setting up procedures for loan processing. It can highlight files that are
lacking needed fields, send them back to the borrowers, and tell the sales/credit department to
rework them. Exception processing may or may not be included in this level, depending on
the organization and product.

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 Next, under writing process. When an application is entirely finished, the
underwriting procedure begins. Now the lender examines the application, taking into account
a range of factors such as credit score, risk score, and many lenders develop their own scoring
criteria that are specific to their business or sector. Nowadays, this procedure is entirely
automated with the aid of a rule engine & API interfaces with Credit scoring engine’s
(CIBIL, EXPERIAN etc.) in LOS. In a rule engine, the lender may load underwriting
standards relevant to goods.

Fifth, credit decision. An application will be approved, refused, or sent back to the
originator for more information based on the findings of the underwriting process. If specific
criteria do not fit the rule engine specified in the system, the parameters may be automatically
changed, such as the loan amount being lowered or the interest rate being changed.

Sixth, quality check. The quality check step of the loan origination process is crucial
for lenders since lending is highly regulated. The application is forwarded to the quality
assurance team, which compares crucial variables to internal and external standards and
regulations. This is the final review of the proposal before it is submitted for financing.

Lastly is loan funding. The majority of loans are funded soon after the loan
agreements are signed. For legal and regulatory reasons, second mortgage loans, business
loans, loan against property, and lines of credit may need additional time. LOS can track
funds and verify that all required paperwork is signed before or at the same time as funding.

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9. CONCLUSION

For commercial lending, are the most popular form of funding because they offer
low interest rates and long-term payment plans. If our business is generating regular
revenue, but we still need additional working capital to grow, a commercial business loan is
something to consider. If we’re able to qualify for this type of loan, we’ll need to determine
what kind of commercial business loan is right for our business. Short-term loans may help
even out cash flow, but large, longer-term loans allow we to grow our annual revenue for
years to come. As with any financial decision, carefully weigh our business’s needs, our
desire for growth, and tolerance for risk before applying for a commercial business loan.
While for corporate lending, this course has covered the basic foundations of corporate
finance by looking at how organisations decide which projects to invest in and how best to
raise funds. The world of corporate lending is arguably one of the most complex in the
world of economics, and even relatively minor events can have massive effects. however, it
is absolutely necessary for modern capitalism to survive, and it is a constant discussion
about how to best manage the risk inherent in this system. These two issues are of
paramount importance to all stakeholders, but especially to shareholders in for-profit
organisations, managers in the public sector and donors to the not-for-profit sector.

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10. REFRENCES

Athony Saundries & Marcia Millon Cornnett. (2012). Financial Market and Institution. The
McGraw.Hill Companies.

Sampson Quain (2018, August 9). Difference Between Corporate & Commercial Banking.
Retrieved from https://smallbusiness.chron.com/difference-between-corporate-commercial-
banking-62835.html

CFI Education Inc. (2015). What is a Commercial Loan? Retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/credit/commercial-loan/

Brendan McGuigan (2022, January 26). What is Corporate Lending? Retrieved from
https://www.smartcapitalmind.com/what-is-corporate-lending.htm

CEIC Data (1996- 2021). Malaysia Bank Lending Rate. Retrieved from
https://www.ceicdata.com/en/indicator/malaysia/bank-lending-rate

Contracts Counsel (2020). Commercial Loan. Retrieved from

https://www.contractscounsel.com/t/us/commercial-loan

Lending Kart Technologies (2021). Corporate Loan. Retrieved from

https://www.lendingkart.com/corporate-loan/

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