LV Thạc sỹ_Financial analysis of customer in Vietinbank

TABLE OF CONTENT
ACKNOWLEDGEMENT.....................................................................................3
EXECUTIVE SUMMARY....................................................................................5
INTRODUCTION.................................................................................................6
1. Rationale.........................................................................................................6
2. Research questions....................................................................................................................7
3. Research objectives.........................................................................................8
4. Research methodology....................................................................................8
5. Research scope................................................................................................8
6. Research structure...........................................................................................8
CHAPTER 1: FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS. .10
OF CUSTOMER..................................................................................................10
1.1. Concept of finance analysis of customer in commercial bank...............10
1.1.1. Definition.............................................................................................................................10
1.1.2. Position in credit process..............................................................................................10
1.2. Role of finance analysis of customer in credit process..........................11
1.3. Rules and method in customer financial analysis..................................13
1.3.1. Rules in FAC......................................................................................................................13
1.3.2. Methods using in FAC...................................................................................................14
1.4. FAC process...........................................................................................21
1.4.1. Gather the information:.................................................................................................21
1.4.2. Perform the analysis:......................................................................................................22
1.4.3. Supply the result in order to make decision:........................................................23
1.5. FAC Experience among commercial banks...........................................23
1.5.1. International commercial banks.................................................................................23
1.5.2. Domestic commercial banks.......................................................................................27
CHAPTER 2: CURRENT FINANCIAL ANALYSIS OF CUSTOMER IN
VIETINBANK HA NOI BRANCH.....................................................................28
2.1. Overview of Vietinbank Ha Noi.............................................................28
2.2. Situation of finance analysis of customer in Vietinbank Ha Noi...........37

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2.3. Evaluating the result of customer finance analysis in Vietinbank Ha Noi
branch................................................................................................................52
2.3.1. Result.....................................................................................................................................52
2.3.2. Limitations and causes...................................................................................................54
2.3.2.2.2. Objective..........................................................................................56
CHAPTER 3: RECOMMENDATION FOR IMPROVING FINANCIAL OF
BORROWER IN VIETINBANK HA NOI BRANCH........................................58
3.1. Direction for development of Vietinbank Ha Noi branch..........................58
3.2. Recommendation for improving the financial analysis of customers in the
branch................................................................................................................61
3.2.1. Human Resource recommendations.......................................................61
3.2.2. Recommendations for improving the content of FAC in Vietinbank Ha
Noi Branch....................................................................................................................................65
3.2.3. Recommendations for improving database used for FAC.............................69
3.2.4. Other recommendations................................................................................................71
3.3. Petitions......................................................................................................72
3.3.1. Petitions to Vietinbank..................................................................................................72
3.3.2. Petition to SBV.................................................................................................................73
3.3.3. Petition to other related departments......................................................................73
CONCLUSION....................................................................................................75
REFERENCES.....................................................................................................76

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ACKNOWLEDGEMENT
.◊.◊.◊.

“First of all, I would like to thank National Economics University (NEU),
especially Advanced Program, for providing much precious opportunities to
know real nature of the banking activities through this internship
Secondly, during data collecting period, Ms…, a loan officer in Vietinbank
Ha Noi branch, and her colleges helped me greatly, especially on collecting
financial analysis data. Without this useful data, I wouldn’t finish this research.
For that reason, I would like to describe my cordial thanks to her and her
colleges.
Finally, as a student in Advanced Class, I was very happy because I could
work on this study with Prof.... I would like to send him big thanks for guiding
and making useful comments to help me finishing this research. Also, I would
especially like to thank all my friends in Advanced Class for all their
encouragement and intellectual support that has made this report possible. Any
mistake is my own responsibility.”

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ABBREVIATION

Vietinbank

Vietinbank Ha Noi branch

BS

Balance Sheet

CFS

Cash Flow Statement

CIC

Credit Information Center

FA

Financial Analysis

FAC

Financial Analysis of customer

IS

Income Statement

NPL

Non-Performing Loans

Pl

Plan

SBV

State Bank of Vietnam

SMES

Small and Medium Enterprises

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EXECUTIVE SUMMARY
.◊.◊.◊.

This research discusses the details of conducting a comparison and analysis of
several model used in Financial Analysis of customer in the commercial banks.
The purpose of this comparison and analysis was not to identify the “best” model
of FAC, but rather to identify varying levels of targets or indicators used in each
method, and to identify unusual or distinct trends, patterns of FAC. It is hoped
that these findings will illustrate the strengths, weaknesses, and current issues of
each model which in-turn will leads to improvements in future FAC.
The models utilized in this research include Ratio model, Comparison model, ZAltman model, DuPont model, and Credit Scoring model. The time period for
this research is from 2009 to 2011. Preliminary results of this research indicate
that a good FAC depending on the method of estimation, the experience of loan
officers, the regulations of the commercial banks and SBV, the availability of
public information, and the strength of information system.

Finally, it is

recommended that content of FAC should be updated and adjusted to bring the
most effective and efficient. It is also recommended that focused human
resources be highly concerned; training and recruitment are necessary to improve
FAC.

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INTRODUCTION

1. Rationale
What is the situation?
Financial Analysis of customer is a very important process in banking activities.
FAC is a part of credit process, and also one of the sources help the banks
determines the creditworthy of the loan applicants. In Vietnam, although the
general model for FAC is the same for all banks, the detail is often different.
Even in the same banks, the process varies to each branch based on the role and
position of that branch. Therefore, the quality of the loan or the way to determine
customer as creditworthy is quite different among banks. It raises the need for
the improvement in FAC..
Why I do this research?
As we all know that credit process is essential in banking activities. This is the
base for the loan officers make the decision. Credit process also helps the bank
improve credit quality and minimize credit risk. In which, FAC is the main
contribution. I want to do this research to understand more about the role of FAC
and how FAC is applying in Vietinbank Ha Noi Branch.
In additions, the change in technology and expanding of customer’s demand
impact on customer financial analysis in some dimensions. These impacts might
be positive or negative. This raise in me the desire to research on these impacts.
All above reasons lead me to the final decision to do this research.

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What are the issues?
Customer financial analysis is a complex process and requires high skill
creditors. In a report funded by USaid (2006), it was said that analysis of the
financial condition of the borrower may require an extensive effort, depending
on the size and complexity of the borrower’s business. The more complex the
borrower, the more difficult it will be to analyze the financial statements and
understand the interrelationship among the balance sheet, income statement and
cash flow statement. If the borrower is part of a larger corporate structure, it will
require an experienced lender, perhaps even a team of lenders, to fully
understand the borrower’s financial condition. Because of this characteristic,
there is often the gap between experience and less experience loan officers. The
lack of expertise can lead to the wrong loan decision or other bad effects.
Besides, in some banks, this process is not considered as important as it would
be. The under estimated this process can lead to risk taking that could otherwise
be detect from doing financial analysis. Also, as I mention earlier, up to date of
the technology and the more popular in the using of applied knowledge in
financial analysis lead the need for improving financial analysis.
2. Research questions
This study will aim at answering three questions:
What is financial analysis?
What are the issues of financial analysis in Vietinbank Ha Noi?
What are recommendations for improving the finance analysis in
Vietinbank Ha Noi?

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3. Research objectives
The purpose of this research is to analyze the issues in financial analysis and
how to make this process more effective in Vietinbank Ha Noi.

4. Research methodology
Data:
Secondary: regulations, newspaper, websiteVietinbank Ha Noi branch’s reports.
Method analysis:
In this research, I will use the comparison method, descriptive method, and
statistic, horizontal and vertical analysis. Also, I will take consider some popular
analysis methods that are using in my developed country. These are DuPont
Ratio Analysis and Comparative Altman Z-Scores method.
5. Research scope
In this research I just pay attention on Vietinbank, Ha Noi Branch and analysis is
just focus on business customer analysis. Moreover, all data will be analyzed in 3
years from 2009-2011.
6. Research structure
CHAPTER 1: FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS
OF BORROWER
This chapter aims at providing readers all information related to financial
analysis of borrower. Information is collected from many sources that I thought
would be useful. I just describe without any further analysis. After reading this
chapter, readers will understand what financial analysis of borrower is, and how
it is done. Also, experiences from both international and domestic commercial

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banks in FAC mentioned at the end of the chapter will be useful for
understanding current situation of FAC.
CHAPTER 2: CURRENT FINANCIAL ANALYSIS OF BORROWER IN
VIETINBANK HA NOI BRANCH
This chapter aims at providing readers all information related to FAC in
Vietinbank Ha Noi branch. All information is collected and observed when I had

an internship in the branch. In this chapter, I not only describe but also analyze to
interpret the issues, pros and cons of FAC. After reading this chapter, readers will
understand how FAC is done in the branch and how this process differs from
theory model that I mention in chapter 1.
CHAPTER 3: RECOMMENDATION FOR IMPROVING FINANCIAL OF
BORROWER IN VIETINBANK HA NOI BRANCH.
This chapter will discuss about how to solve the limitations and issues in the
chapter 2. Also, several petitions to Vietinbankb, SBV, and related department
will be given in order to facilitate the improvement of FAC.

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CHAPTER 1
FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS
OF CUSTOMER
1.1.

Concept of finance analysis of customer in commercial bank

1.1.1. Definition
FAC (also referred to as financial analysis of customer) refers to an assessment
of the viability, stability and profitability of a business, sub-business or project.
It is performed by professionals who prepare reports using ratios that make use
of information taken from financial statements and other reports. Then, these
reports are usually presented to top management as a base for making business
decisions. Based on these reports, Loan officers may make decisions regarding
investing or lending (Wikipedia).
1.1.2. Position in credit process
There are six steps in the lending process in commercial bank. These are:

Step one:

Finding Prospective Loan customers

Step two:

Evaluating a prospective customer’s character and sincerity

of purpose
Step three: Making site visits and evaluating a prospective customer’s credit
record
Step four:

Evaluating a prospective customer’s financial condition

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Step five:

Assessing possible loan collateral and signing the loan

agreement
Step six: Monitoring compliance with the loan agreement and other
customer service needs
FAC is the fourth part of the credit process. In this part, loan officers will collect
several crucial documents from borrowers in order to fully evaluate the loan
request, including complete financial statements (BS, IS, CFS) and other
documents depend on the regulation of each bank and depend on the law.
“Once all documents are on file, the lender’s credit analysis division conducts a

thorough FA of the applicant, aimed at determining whether the customer has
sufficient cash flow and backup assets to repay the loan. The credit analysts
division then prepares a brief summary and recommendation, which goes to the
appropriate loan committee for approval. On larger loans, members of the credit
analysis division may give an oral presentation and discussion will ensue
between staff analysts and the loan committee over the strong and weak points of
a loan request.” (Peter S. Rose & Sylvia C. Hudgins, 2008)
In Vietnam, this process is made by loan officer or creditor and most of them are
done through supporting of technology and software. The credit analyst just
interprets the result to make recommendation on the lending decision.
1.2.

Role of finance analysis of customer in credit process

FAC plays several important roles include:
First, FAC detects and limits the risk faced by banks, especially the risk from
lending such as risk from pay back the loan, bad debt, liquidity risk, etc.. By
doing FAC, the bank can determine the proper reserve. Besides, evaluating the

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risk also help banks make the right lending decision, and more efficient in using
banks’ capital. Therefore, FAC can enhance the ability to generate profit for the
bank.
Second, FAC is very important in making lending decision. Because FAC
activities are done before making lending decision, FAC gives the loan officer
the deeply understanding about company including the ability to control cost,
ability to generate revenue, ability to pay back the loan, etc. Besides, FAC also
helps the creditors anticipate future cash flow of the companies. If the companies

can continually maintain the good financial condition, banks will approve the
loan applicant. Vice verse, if the situation of the companies in the future is not
good, the bank might not approve the loan applicant to protect the banks’ capital.
It is important to remember that FAC is not the only source for the bank to make
the final lending decision. Lending decision is based on many factors such as
legal entity, firm’s management, relationship between firms and other financial
institutions, etc. Therefore, in some case, even the FAC show the not good view,
the firm may still receive the money from banks.
Thirdly, FAC is the non-stop process until the loan is fully collected. For that
reason, FAC is also a tool for the banks to control and supervise the loan. After
loan decision is made, if FAC result indicates that the firm and the loan may be
in problem, the bank may need to have action to collect the loan or to warn the
firms. For instance, the firm’s loan applicant aim at investing in fixed asset, and
after the firms receive the money, the ratio Fixed asset/ Equity is unchanged.
This is the indicator that the firm uses the loan for other purpose. The bank need
to have action in order to supervise the loan to ensure whether continue the loan
or not.

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One issue here is that the FAC’s role as supervising tool is only effective when
the financial data is correct. The reality, borrowers often do not provide the
accurate information for the banks or the information is made up in order to
fulfill the requirement of the bank. Moreover, banks also do not have enough
tools to detect or figure the accuracy of supply information.
Fourth, data from FAC process is stored and used for further analysis. For
instance, from collecting data for FAC, banks can build the data base about
customers, especially the data in financial statement. Combining with enhancing
relationship with customers will be helpful for banks in the future. Good data

base will be useful in anticipating the future of the companies.
1.3.

Rules and method in customer financial analysis

1.3.1. Rules in FAC
There are three rules in doing FAC:
First, FAC should be done periodical. It’s up to the condition of the bank so that
FAC can be done monthly, quarterly or annually. This rule is set up to ensure that
banks can detect the problems and have immediate action to limit the possible
risk. The more frequency doing FAC, the faster the bank can detect the problem.
Second, FAC must be trustfully and accurately. This rule is based on two factors,
the ethic of the loan officers and the truthfulness of the customers. Because, the
sources of financial statements mostly come from customers, these financial
statements may be audited or unaudited. The un-ethics can happen when the
customer did not provide the accurate data. The moral of creditor is also very
important. Recently, in some cases, customers had lobbied creditors in attempt to
receive the loan from bank. The case was just revealed when the customer was

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bankruptcy and couldn’t pay back the loans. Therefore, both of these criteria
should go in the same direction to bring the most benefit to two parties.
Finally, FAC must anticipate the risk in the future. FAC based on the past and
current information to determine the current situation of the firms, while future
cash flow from firms is the key to determine if the firms can pay bank the loan.
So, from FAC, loan officer must anticipate the situation of the firm in the future.
The more the accurate of the anticipation, the better be the lending decision.
1.3.2. Methods using in FAC

There are several methods that often be used in FAC. Those are:
RATIO METHOD: From Wikipedia/Financial analysis, this method is defined
as using ratio in analyzing the firm condition. There are often four groups of
ratios:
1. Profitability - its ability to earn income and sustain growth in both short-term
and long-term. A company's degree of profitability is usually based on the
income statement, which reports on the company's results of operations;
2. Leverage - A company's leverage relates to how much debt it has on its
balance sheet, and it is another measure of financial health.
3. Liquidity - its ability to maintain positive cash flow, while satisfying
immediate obligations;
4. Stability- the firm's ability to remain in business in the long run, without
having to sustain significant losses in the conduct of its business. Assessing a

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company's stability requires the use of the income statement and the balance
sheet, as well as other financial and non-financial indicators.
In many case not all of these ratios was taken into consideration. The loan
officers, depending on each specific case, decide which groups of ratio are taken
into highly consideration and which are not or consider only minor indicators.
Nowadays, some banks using software and technology to facilitate this process
and make it more accurately. This method is gaining popularity because this
method is simple and easy to interpret.
One weakness of this method is that ratio is calculated based on the current data,
the result itself does not show the trend of future firm’s situation, and do not
reflect the change of ratio through time, and take into relation with other
competitors and industry. Also different accounting methods may result in
significantly different ratio values. Some common ratios that are usually used in

FAC can be seen in the appendices.
COMPARATIVE METHOD: a method of comparing financial values in a
certain order to determine the financial situation of customers. To apply this
method, credit analyst needs to ensure suitable conditions of the financial criteria
such as same unit, same content, same nature, same space, etc.
There are various comparison types: vertically or horizontally comparison, time
comparison or space comparison. Melissa Bushman (2007) suggested two
common types of comparison analysis that are:
Horizontal Analysis

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The horizontal analysis compares specific items over specific periods. The
horizontal analysis can be classified in two ways:
Absolute Currency
One way is comparing the absolute currency amounts of certain items over a
period of time. For example, this method would compare the actual currency
amount of operating expenses over a period of several accounting periods. This
method is valuable when trying to determine whether a company is conservative
or excessive in spending on certain items. Also, this method is useful in
determining the effects of outside influences on the company, such as a reduction
in the cost of materials.
Percentage
The second way is comparing the percentage difference in certain items over a
period of time. The currency amount of the change is converted to a percentage
change. For example, a change in revenue from VND 100 billion in period one
to VND 110 billion in period two would be reported as a 10% increase. This
method is particularly useful when comparing small companies to large
companies.

Vertical Analysis
The vertical analysis compares each separate figure to one specific figure in the
financial statement. The comparison is reported as a percentage. This method
compares several items to one certain item in the same accounting period. Loan
officers often expand upon vertical analysis by comparing the analyses of several
periods to one another. This can reveal trends that may be helpful in decision

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making. Here are two simple examples of vertical analysis comparison on
income statement and balance sheet.

Income Statement
Performing vertical analysis of the income statement involves comparing each
income statement item to sales. Each item is then reported as a percentage of
sales. For example, if sales equal VND 100 billion and operating expenses equal
VND 10 billion, then operating expenses would be reported as 10% of sales.
Balance Sheet
Performing vertical analysis of the balance sheet involves comparing each
balance sheet item to total assets. Each item is then reported as a percentage of
total assets. For example, if cash equals VND 10 billion and total assets equals
VND 100 billion, then cash would be reported as 10% of total assets.
DUPONT METHOD: Saunders (2000) provides a model of financial analysis
for financial institutions that is based on the DuPont method. This method is
based on the system of financial analysis return on equity model. The return on
equity model is disaggregated into the three components including net profit
margin, total asset turnover, and the equity multiplier. The profit margin allows
the loan officers to evaluate the income statement and the components of the
income statement. Total asset turnover allows the loan officers to evaluate the

left-hand side of the balance sheet which is composed of the asset accounts. The
equity multiplier allows the loan officers to evaluate the right-hand side of the
balance sheet which is composed of liabilities and owner’s equity. Moreover, this
method is not only analyzing the financial firm’s performance but also provides a

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system for planning. DuPont method can be used to develop a pro forma income
statement. From the pro forma statement, loan officers can anticipate the future
net income level, total revenue level, etc, and this will be the base for bank
officers determine the future perspective of the borrowers. Here is how return on
equity decomposed:
ROE = (ROA) (EM)
ROA = (NPM) (TAT)
Where,
ROE = return on equity

ROA = return on assets

EM = the equity multiplier

NPM = net profit margin

TAT = total asset turnover
Return on equity is net income divided by total equity capital and return on
assets is net income divided by total assets. The equity multiplier is the ratio of
total assets and total equity capital.
ROE = (NI) / (TEC)
ROA = (NI) / (TA)

EM = (TA) / (TEC)
Where,
NI = net income
TA = total asset
TEC = total equity capital

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CREDIT SCORING METHOD: From Wikipedia/Credit score, a credit score
is defined as a numerical expression based on a statistical analysis of a
borrower's information to help the bank determine the creditworthiness of that
person.
Wallis, Lyle Paul (2001) said that credit scoring can be defined as a method of
evaluating the credit worthiness of your customers through the implementation
of a formula or set of rules. Testing the credit worthiness of your customer base
via a credit scoring model is by no means a new science, but it is a methodology
that has evolved over the last quarter of a century. Today credit scoring is set to
be the corner stone of the credit granting process for the future.
Credit scoring provides a lot of benefits to commercial banks. These benefits
include speed, accuracy, consistency, reduction in bad debts, prioritization of
collection activities and reduction in time required for risk assessment. With
credit scoring, entire financial information can be reviewed at one time rather
than considering separately as in traditional methods. Besides, accuracy is
enhanced because risk from human error is low. This process is automatically
done by computer. Consistency is attained by using the same set of rules and
weighted variables for review of the entire data. Through credit scoring, loan
officers can regularly review the entire information; therefore, they can quickly
and efficiently identifying those accounts that require immediate attention for
collection activity or other needed actions to facilitate the bad events.

Credit scoring is also useful for the banks in making lending decision. Banks use
credit scores to evaluate the potential risk faced by lending money to consumers
and to mitigate losses due to bad debt. Banks use credit scoring to determine

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who qualifies for a loan, at what interest rate, and what credit limits. Banks also
use credit scoring to determine which borrowers are likely to bring in the most
revenue. For that reason, credit scoring is preferred to almost commercial banks.
Wallis, Lyle Paul (2001) considers three factors in credit scoring. These factors
are traditional credit information, credit agency information and financial
statement scores. Traditional information includes pay history, bank ratings,
trade reference information, industry credit group information, control years,
NSF checks reported or placed for collection, suits or judgments and tax liens.
Examples of agency information include D&B ratings and paydex scores,
NACM evaluations and Experian DBT, and intelliscores. Financial statement
scores include Liquidity Ratios, such as the current and quick ratios, Profitability
Ratios, such as return on equity and percent of total assets, and Solvency Ratios,
such as debt to equity and fixed assets to tangible net worth.
To do credit scoring, loan officers can approach through behavior based scoring,
rules based scoring and neural network modeling. Based scoring approach uses
regression techniques and identifies to find to level of default of businesses.
Rules based scoring is calculated through weighted values which are assigned by
users. Neural network approach is a statistical based scoring model. The basis for
this approach is a series of algorithms that are constantly and automatically being
refined and updated by the time.
It’s still the debate to clear which approach is the best. Each approach has its
own advantages and disadvantages. Many people suggest users should use
combination of these approaches in order to get the best result.

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Here is an example of credit scoring model applying popular over the world:
FICO model is one of the best-known and most widely used credit score models
in the United States and many countries.
The following is a percentage breakdown of a FICO score:
35% - Payment History
30% - Debt Ratio
15% - Length of Credit History
10% - Types of Credit
10% - Number of Credit Inquiries
In the US, FICO Credit scores range from 300-850, with 723 being the median
FICO score of Americans. FICO scores below 600 are considered high risk
borrowers, 620 being the dividing line between good and bad, 640 or above
being "pretty good", 650 as average general credit-use behavior, and above 690
or 720 being excellent. Scores are based on payment history, outstanding debts,
credit history, new credit, and credit in use.
1.4. FAC process
1.4.1. Gather the information:
Information sources relevant to borrowers include but are not limited to:
financial statements from the supplier, government documents, and information
from commercial resources, analyses by brokerages, interviews with supplier
personnel, information in audit reports and the media. Information from audit
reports and data from commercial information sources are useful but are not to

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be used alone as substitutes for the complete analysis. Information need to obtain
from the borrower at the minimum: the most recent year and the two previous
fiscal years' balance sheets, income statements, plus current interim financial
statements and cash flow forecasts. Additionally, loan officer had to obtain
information about: contract backlog information, inventory costing method
used, credit/banking line and obtain a point of contact for following through on
references with the bank and/or lending institution. Obtain enough information
from the documents to ascertain whether the borrower has sufficient working
capital/ cash flow to perform the contract.
1.4.2. Perform the analysis:
After gathering information, loan officer had to perform an analysis by
considering all relevant data. Loan officers had to review the supplier's financial
statement in recent periods. A typical analysis also includes review of the
supplier's inventory costing method, credit availability, and cash flow
projections. As part of the analysis, examination of accounting records for the
review include, but is not limited to liquidity, leverage and profitability ratios,
and working capital analysis. Analysts perform the significant ratios and should
consider the Altman's Z-Score as well as address the trends over time. Loan
officers also need to become familiar with assumptions inherent in the analysis
models that might be used in performing the analysis or for making comparisons.
Once the ratios are computed, make (peer) comparisons to acceptable industry
standards. Other elements to review in order to have a complete analysis
include:

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

The supplier’s operational environment. Consider the general economic

outlook, the industry's outlook, the company's competition, the potential
impact of Government actions, and changes in technology. Other factors
may include the outlooks for the credit and capital markets, foreign
competition, or other external factors that may affect the supplier's
financial condition.



The supplier as a business entity. Problems such as those in production
and quality, marketing, pending lawsuits, subcontracting and purchasing,
pending or current restructuring and labor and management stability are
internal to the supplier. They may affect the supplier's financial
condition. Some conditions and factors to be considered are changes in
deliveries, changes in subcontractor/vendor relationships with the supplier
as well as changes in accounts payable. These conditions may indicate
financial stress. Investigate further as necessary.

1.4.3. Supply the result in order to make decision:
Analysis result will be submitted to lending committee if the loan amount is
large or submitted to the manager for approval and signature. The manager will
carefully revise the analysis again and then accept the loan. If the manager finds
something wrong or unclear, he or she would ask loan officers for more details to
decide whether accept the loan or not. When the loan application is accepted, it
will be delivered back to the loan officers and to risk management department
for excising and control after lending.
1.5.

FAC Experience among commercial banks

1.5.1. International commercial banks

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In international commercial banks, a prospective lender will use four primary
financial statements for assessment. There are personal financial statement,
balance sheet, income statement, and cash flow statement. A Personal Financial
Statement indicates your net worth. Each partner or share holder owning a
substantial percentage (for example, 20 percent or more) of the business should
submit one. A personal financial statement is necessary to the lender, especially
in case borrowers have never received financing for their business before,
because it gives the lender evidence of personal assets that borrowers could
pledge

to

secure

a

loan.

A

Balance

Sheet

provides lender a snapshot of borrower’s business at a specific time. This
statement gives the information about assets, liability and equity of the

borrowing company. A Profit and Loss Statement shows the profit or loss for
the year. Finally, a Statement of Cash Flows presents the sources of cash in
your business such as net income, new capital, or expenditures over a specified
period of time.
In additions, lender often uses financial ratio analysis. Ratios permit review of a
company's current financial performance versus that of previous years. In
international banks, loan officers are trained to appreciate both the benefits and
limitations of ratio analysis and to consider financial results in the context of the
company's "peer group" of similar companies within its industry.
Loan officers also look at Pro Forma Financial Statements and Financial
Projections during their analysis process. Pro forma financial statements are the
entrepreneur's best guess about what next year will look like for the business.
Thus, loan officers could anticipate whether future cash flow will be sufficient to

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cover all borrowers’ costs, and if not, how much money borrowers will need to
borrow. Meanwhile, financial projections helps loan officers estimate about
future sales levels, expansion costs, or general business conditions and see how
such conditions would affect borrowers’ financial results in the future.
Loan officers usually look for customers who don`t have a history of failing to
pay their debts (or who have a history of constant late payments), and who don`t
seem over-leveraged. For that reason, loan officers pay high attention of business
credit scores before issuing a loan. Also, commercial lenders consider industry
ratio analysis an important component of cash flow projections and of the
commercial loan application package. Loan officers often consider the use of
industry ratio analysis to be critical with regard to the potential success of the
business. Furthermore, the role of loan review process is highly gain attention of
loan officers because they believe that this process is extremely useful in gaining

understanding of what the borrower’s business is about.
ALTMAN Z-SCORE: This method is applied to predict the probability that a
firm will go into bankruptcy within two years. The model look quite simple but
the original number generated in the model is very complex. This method uses
multiple corporate income and balance sheet values to measure the financial
health of a company.
In estimation of the formula, four or five common business ratios, weighted by
coefficients, are combined in linear relationship to create this model. The
coefficients were estimated by a complex process of collecting sample of firms
which had bankruptcy or survived, with matching by industry and approximate
size (assets).

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