Selection of Borrowers
The selection of a reasonable and trustworthy borrower is complicated and at the same time very sensitive task which requires decision-making power from the bank employees. In the words of the manager of a branch of Muslim Commercial Bank, Ltd. "Good selection of borrowers does the half task in the profit of the Bank. 'Bank do not through money away but every application is tested carefully before being sanctioned.
To assist the Branch manager in this test, bank provides a performed, outlining the manner in which a proposal should be put forward for consideration. If any specific information that is required is not mention, it affects the proposal as a whole, making it appear weak or inconvenience, it is therefore, necessary for credit officers to see that all relevant questions following are, as far as possible completely and exhaustively answered.
Following are 6'C, S and 3P's, which are considered before lending:
1. Character
The bank get to know the customer we!! and be able to judge his intentions, for the bank shall be entering into a contract with him involving the financing of his business. It is, therefore, common and business senses to make sure that the other party to this contract will live up to his obligations, this factor, therefore, contributes significantly to the safety of the advances, as it relates to the willingness to repay under all circumstances. Particularly adverse circumstances. Are the partners or directors of the business unit, which is seeking finance, persons who can be relied upon as regards details of their proposal as will as promise of repayment? What is their reputation in the market place for meeting their commitments in respect to prices & delivers to purchasers and timely payment to their trade creditors? Confidential and tactful inquiries from wholesalers, suppliers and other bankers are necessary to obtain this essential information.
2. Capacity
This factor relates to the ability of the borrower to manage his business successfully. Do they have the necessary management, accounting and technical skills? And the degree of experience, in the particular line of business for which the finance is required, to utilize the advance productively and profitably, so that repayment is possible, along with our share of the profits? This ability can be judge from the trading results. A study of the company's audited financial statements for the past few years would real whether sales have deep growing, stagnating or declining or declining. Similarly, the trends of gross & net profit margins indicate the profitability or other wise of the business. The efficiency of the management can be Judge from the turn-over ratios, collection of receivable and management of accounts payable.
3. Capital
The proportion of the borrower's own resources to the amount of finance is requested, is the next point to receive the branch manager's attention.
Is the amount required in proportion to the borrower's capital and contribution to the project? Is it within the powers of the borrower? In the case of a corporate customer, a check on the memorandum & articles of association is necessary to ensure it is within prescribed limits. If the amount describe to be borrowed is too large. Under the circumstances, can it be sagely reduced to an acceptable & practicable level? Past experience has taught bank that it is unwise to lend more than is actually required, as it sometimes has led to speculative uses of the surplus.
