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  3. What are the warning signals to potential bad loans? Explain them. The potential

What are the warning signals to potential bad loans? Explain them. The potential

游客2025-06-21  9
问题 What are the warning signals to potential bad loans? Explain them.
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答案 The potential bad loans can be identified from the following warning signals:
    Poor management:
    —Poor management of the business and its limited ability to cope with the changing environment is the basic cause of business failure.
    —Indications of potential business failure involving poor management:
    -insufficient managerial personnel at various levels of operations;
    -disharmony within the management team;
    -chaos caused by major re-organization or relocation;
    -over-ambitious expansion of operations;
    -lack of financial or operating controls.                                 
    Industrial/market conditions:
    —Market conditions, such as keen competition among producers, declining market demand and change in the preference of consumers, may lead to business failure:
    —Aspects should be paid attention to:
    -adverse performance of the company compared to its competitors;
    -advanced technology which is expensive to keep up with;
    -change in consumers’ preferences, tastes or fashion;
    -threat caused by new entrants to the market and deteriorating market shares;
    -monopoly power created by mergers or acquisitions.                  
    Economic and political conditions:
    —The economic and political conditions will largely influence the business.
    —Unfavorable situations of a business may be subject to:
    -economic slow-down or recession;
    -deteriorating political stability;
    -adverse conditions due to social unrest and pressure groups’ campaigns.   
    The implications of a client’s bank account
    —Basically show the background and financial statistics which serve as a primary source for detecting possible problems in a client’s financial position.
    —Indicators:
    -static or hard-core overdraft;
    -growing numbers of cheques with "insufficient funds" claimed by the client’s customers;
    -excessive number of post-dated cheques;
    -frequent drawings against uncleared funds;
    -frequent excesses over agreed credit limit;
    -deficiencies in loan repayments;
    -past due import bills;
    -unusual increase in credit enquiries concerning the client’s account from other banks and financial institutions;
    -frequent cheque "kiting".                                                
    Financial position
    —Financial statements will reflect the deterioration of the company’s financial position.
    —Any deviation from the norm or market average would be a good indicator reflecting a business financial position.
    —Indicators:
    -liquidity ratios;
    -debt ratios;
    -profitability ratios;
    -coverage ratios;
    -trends over time;
    -cash-flow;
    -flows of other funds and forecast figures.
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