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Debt Management

INTRODUCTION

In the process of extending credit facilities to customers, banks face the risk of either loosing part or all of the loaned money. The risk involve in credit grant to customers constitute a major risk faced by banks. Although, it is argued that in all banking activities there are elements of risks involve, but credit risks surpasses pother risks faced by banks. It thus, requires that banks should stick to a sound strategy for operating its process of credit granting to customers.

According to Basel Committee for Banking Supervision (2000), “Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms”. In order to avoid an implication of huge risk and the actual lost of lent money to customers it is necessary that sound administration of lending system is put in place by the banking organization. How would the bank ensure that it operates a sound banking credit risk management? It requires that the guideline and strategy for credit administration is one that is drawn based on adequate evaluation of the credit to be giving out and the understanding of the customer to whom this loan is to be given to.

Furthermore, every members of the organization that partake in the process of credit administration are made to follow the sound laid down policy by the organization. The gathering of the right information about the credit risks to be contracted with the bank borrower, including information about their credit worthiness is significant for credit management. In this view Thadden (2001), argues that, “This inside information gives existing lenders an informational advantage over potential competitors at the refinancing stage and reduces ex-post competition.

Hence, an initial situation of competition between symmetrically informed lenders turns into one of asymmetric information once one lender has attracted the business and dealt with the customer for some time. Since borrowers and lenders rationally anticipate that the borrower will be ‘informationally captured’ in the relationship in the future, initial finance is offered at a discount which reflects the expected mark up on future terms of finance”. The quality of information gathered by the lending bank on the customer seeking for credit would help it in making its decision whether to approve or reject such credit grant. This will go a long way in preventing the bank from incurring high credit risks.

 OPERATING UNDER A SOUND CREDIT GRANTING PROCESS

The process for sound credit-risk management should be one that is explicit and understandable to all members of the bank who are directly or indirectly partakers in the process of granting loan. Furthermore, there should be in place an assessment process for new investment and credit sort by customers. It is also a good practice that a sound credit-risk management be accompanied with mechanisms for revaluation, renewal, and refinancing of existing credits. This process requires that the management of such bank should be in tune with current economic happenings and changes in credit facilities.

In this view Geisen & Brandes (2002) argue, “Financial markets nowadays are becoming more and more complex. New financial instruments are being created almost every day. It is therefore of essential significance to every participant in these markets to understand price generating processes and the factors affecting these”. This would  enable the management of such bank be able to decide the limitation to be placed in the awarding of a specific credit, and at what level of interest to peg its credit grant.

For instance, banks that deals in the granting of loans to foreign individual or corporate bodies need to do a through evaluation to make such the deal are compactable with the practices in the home country of the borrower. Most banks in recent times are reluctant about granting loans because they want to reduce the risk faced in such financial deals. According to Goldberg (2001), “Over the past two decades, the U.S. banks engaged in international lending have become more diverse: there are now fewer banks overall, and these banks are more polarized in terms of their size and portfolio allocations”.

For Basel Committee for Banking Supervision (2000), the principle 6 admonished bank management to put in place a sound credit-risk management by adequately coordinating the functions of the different individual that partakes in the credit grant to customers. Since they operate at different levels, which include business origination functions, credit analysis functions, credit approval functions, etc. they different aspect of work should be coordinated to be in tune with the guideline laid down by the organization.

It is further advised that bank should put in place a formal transaction evaluation and approval process for granting credit. In addition, the approval of each credit proposal is to be careful analysis by expert analysts. This would give the banking organization the accurate information it needs to evaluate the credit grant and make it fortify its documentation process.

Lastly, it is recommended that the bank should build up strong credit officers, who are experienced and knowledgeable, in making prudent judgments in assessing, assigning, and approving credits to customers. Thus, accumulation of capable and experienced credit officers would lead to the operation of a sound credit-risk management in a financial institution.

PROCESS FOR APPROVAL NEW CREDIT IN BARCLAYS BANK

The UK financial industrial sector is accredited with about 1,800 organizations, and a workforce of 28,000. “…the financial services sector makes a significant contribution to the Welsh economy. The sector currently generates 5% of Welsh GDP and is highlighted in The Welsh Assembly Government’s economic development strategy, “A Winning Wales,” as a key sector for development” (Source: ABI 2002, cited in West Assembly Government, 2006).

Barclays Bank is a formidable commercial bank operating in United Kingdom, with several years of experience. The bank gives credit facilities such as loan to businesspersons with the intension to engage in the expansion of their business operations, and those seeking to enter into new business venture. The financial institution takes adequate time to educate its customers seeking for loans on ways to operate their borrowed capital in order to be free from debt. Thus, debt management education is a significant aspect for orientating and enlightening the bank customers on ways to effectively managed borrowed resources.

This education on debt management inform customer on ways to ensure that they create budget and engage in judicious spending of borrowed funds in order not to be plunged into other unsolicited debts. The need not to ignore debt problem is advocated as a way of preventing a status of credit unworthiness for future borrowing. The Barclays bank is one that sympathizes with its borrowers and seeks ways to help them out with their debt problems; it operates within the Banker Code of which it is a subscriber. “…As soon as you think you may have a debt problem contact your creditors to negotiate or lengthen the term of your debts.

They will usually be receptive as an escalation of the problem is in no-one’s interest. Check whether your lender is a subscriber to the Banking Code. Lenders who adhere to this voluntary code (like Barclays) commit to considering cases of financial difficulties ‘sympathetically and positively’” (Barclays, 2007). The bank uses its data information in carrying out a formidable credit risk management. Information gotten from data of passed and present activities on credit awards is a vital tool for planning and strategic decision making for the management of credit-risk. According to Basel (1998), “Developments in risk management modeling techniques have allowed some banks to implement a number of measures to strengthen their management of risk.

Several banks explained how they analyzed credit and market risk on an integrated basis, although the scope to do this was limited by a lack of data in some areas”. Thus, the utilization of data for planning and decision-making is significant for adequate risk management especially as it concerns with credit administration.

Barclays bank operates one of UK cheapest secured loan grant. It interest for secured loan is 6.3%. The process of securing, especially unsecured, loan from Barclays bank is made easy as applying via online application. It is testified by a Barclays’ customer that he applied for a loan via online and got it same day in his account with the bank. The rigors experienced by customers in their quest to secure loan is made easy by the institution process of credit administration.

Unsecured Debt – total loan and credit card debts excluding mortgage and any hire purchase administered by Baclay .

By picklesj1 from England on 20th Sep 2006

picklesj1’s Ratings
Loan Rate 6.1%
Value for money 8/10
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picklesj1’s recommendation

Source: www.reviewcenter.com (2006)

The granting of secured loan in the bank ranges from 5,000 pounds to 100,000 pounds. This is made cheap and easy for house owners. The loan administration in the institution is made easy for every category of customers.

Those who sought for unsecured loans are granted £1,000 and £25,000, unsecured. House owners can secure secured loan, against their property worth up to £100,000. With Barclays’ loans, customers also stand to benefit from a low APR (even lower for existing Barclays’ customers) and borrow more money on top of an existing loan – a top up (fairinvestment.co.uk, 2007). From the foregoing, it is seen that the process of granting loans to customers of Barclays is made easy and accessible by all. This is further made cheaper to incur compare with the interest charge other banks in the in industry.

One significant aspect of credit management in Barclays bank is the regular review of its credit and loan facility. This is done at interval to make sure the risk accompanying credit grants are not under estimated. thus, giving the financial institution the information it need to estimate interest charged against credit borrowed by customers and the level of risk associated with each of the credit grant it makes.

  The need for financial institutions to be sensitive with the changes in risk management is a vital aspect of a sound credit-risk management. For instance, “the bank claims on emerging markets by large U.S. banks are sensitive to U.S. cyclical conditions. The countries end up with a more diversified supply of credit, but claims on emerging markets could fluctuate with conditions in foreign markets. The patterns of exposure of small U.S. banks may be driven more by trends, while the exposures of larger U.S. banks may be driven more by changes in market fundamentals” (Goldberg, 2001).

CONCLUSION

It is seen from the foregoing that credit risk management as posited by the Basel Committee is not a sacrosanct issue that is practically followed by banks in their administration of credit grants. As we see thus, the point raised by the committee is significant for a sound credit –risk management, but due to certain factors that have to do with competition for grabbing the larger market share in credit grant banks do not follow the observation of the rational steps as outlined by the principle six sets out for sound credit-risk management.

Banks sometimes have to soft peddle in other not to scare viable customers away from seeking credit. As in the case of Barclays Bank it is seem that, though the organization practices some measure of security on credit given to customers, on the other hand it has devised ways of making the securing of these credits easy and conducive for its customers, with means for refinancing.

It is thus, necessary that for sound credit-risk management organizations, especially financial institutions, should put in place means for assessing and evaluating new areas of investment brought in by customers for financing. Furthermore, there should be a review of the credit granting process of banks to make them get the right information on the contemporary economic situation and be in tune with risk associated with the financing of certain business investments.

REFERENCES

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Barclays (2007), “Debt Management” http://www.personal.barclays.co.uk/BRC1/jsp/brccontrol?task=articleFWgroup&value=9100&target=self&site=pfs (06/03/07)

Basel (1998), “Bank For International Settlements on the Use of Information and Risk Management by International Banks” http://www.federalreserve.gov/boarddocs/surveys/RiskMgmt/riskmgmt.pdf (07/03/07)

Basel Committee for Banking Supervision (2000), “Principles for the Management of Credit Risk” http://www.bis.org/publ/bcbs75.pdf (06/03/07)

fairinvestment.co.uk  (2007), “Barclays Loans” http://www.fairinvestment.co.uk/best_loan_deals.aspx (07/03/07)

Geisen, Tobias & Brandes, Leif (2002), “On the Impact of 24 Hour Interest Rate

Payments in Fx Markets” Seminar Paper, Seminar on High Frequency Finance. June

Goldberg, Linda S. (2001), “When is US Bank Lending to Emerging Markets Volatile?” Working Paper 8209, National Bureau of Economic Research http://www.nber.org/papers/w8209.pdf (08/03/07)

http://www.olsen.ch/center/papers/Brandes%20Continuous_interest_rates.pdf (12/12/06)

Reviewcenter.com (2006), “Barclays Bank Loan Review” http://.www.reviewcenter.com/reviews5460.html  (06/03/07)

Thadden, Ernst-Ludwig von (2001), “Asymmetric Information, Bank Lending and

Implicit Contracts: The Winner’s Curse” http://www.hec.unil.ch/deep/textes/9809.pdf (06/03/07)

West Assembly Government ( 2006)., “Financial Services Sector “http://www.wda.co.uk/index.cfm/sectors_microsite/en4490  (05/ 01/07)

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