The Credit Worthiness for Black Gold Limited - Case Study Example

Loan Report The credit worthiness for Black Gold limited Executive summary The credit assessment and appraisal of business for loan approval is one of the fundamental factors that many bank do consider with cautions since, poor loan appraisal and underwriting process will make the bank suffer significant loss. In order to mitigate for credit risk, the bank of Indonesia appraised the black gold financial report for the last 3 years. The assessment entailed the use of ratio analysis, cash flow study, as well as making the forecast as to company’s future state of affairs (Anthony Saunders, 2001). This is will therefore provide a good platform for concluding on the extent of loan to be awarded to the business given the business threats that bank will be exposed to. The loan application status was concluded after following the comprehensive analysis of the company’s financial performance foe the last three years and generating forecast of the company’s prospect performance. The credit worthiness of the company provides a pleasurable outcome and consequently the business meets the requirements for loan subject to restriction. The financial statement submits an analysis that the business is improving from financial despair and the loan market base such as at 95% lending rate would be relevant since, the business situation is risky and hard to predict the future business performance (Pacelle, 2003). At 95% confidence level therefore, would make the bank certain at there is 5% risk that the company will fail to repay the loan die to loan default in view of the fact that the tendency of the business is irregular and consequently it is hard to estimate the exact prospect tendency of the company situation and concluding on the amount of loan to be process. The credit appraisal of the company was concluded after following services of financial report assessment. Some of the appraisal technique employed by the company includes the use of ratio analysis (Murphy, 2008). This is relevant since; it will aid the business in understanding the present, past and forecast business performance as well as help in concluding on the extent of loan application. The objective of detailed scrutiny of the company financial performance is to help the business get rid of credit risk as well as help the company from facing financial risk that might make the business run at a loss. Understanding Black gold limited Risk and return The financial performance of black gold limited depict an increase trend and consequently, the business situation of the company cannot be clearly predicted since, the business might be facing financial liquidity problem or the company has recovering from depression. This state would the bank susceptible to credit risk unless the financial situation is proven beyond. From the normal appraisal perspective, the bank re-assess the company’s financial history and forecast the future performance of the company, the projection is made at 95% confidence level implying that. The bank is ready to tolerate 5% credit. Under the value at risk approach, the credit risk that the bank might incur will be subject to (5%*5billion=$250,000 million} this is huge amount that bank will be ready to take up given the existing businesses situation of bank gold limited. As result, the bank will re-asses the amount of loan and commands the company to resize the size of loan in order to ensure that the business can comfortably pay the debt as well as guarantee the going concern assumption the busines. Other aspect that were deem necessary in appraising the credit worthiness of black gold limited is the collateral for loan. This is achieved by understanding the asset worth of the company in relation to the size of the loan and whether the company’s asset can cover up the loan repayment incase of loan default (Sylvain Boutellie, 2012). Despite the fact that the business is generating positive cash flow, a significant nature of the security that might make the company susceptible to run something must appraised. Not all assets can fiancé the loan and this was another factor that was considered by the bank in appraising the credit worthiness of the bank. Suggestion on loan application status After a detail analysis on the final report as well as other business external factors affecting the company, a report is concluded concerning the loan status for black gold mine. The report provides that the bank will not comfortably process the full loan amount of 5$ billion since the operating capacity of the company is not 100%.This is because, the company state of affairs is healing from a downfall in net profit due to factors beyond the control of the management. In this regards, it will hard for the bank to forecast the future trend of the company performance and consequently, the company will consider processing the loan for the company to the extent of 85% (95%*5$billion} =$4.25 billion worth of loan. The 15% margin serves to act as risk margin (tolerable error that the bank will condone in risking the loan to the business. The risk adverse strategy adopted by the bank is important since, it will act as margin that helps the bank not to incur huge amount of credit risk due to inadequate risk assessment and mitigation by the loan and credit officer. The risk technique employed by the bank in concluding on the amount of loan is the use of VAR tool (Value at risk).This is the arithmetical technique used to establish as well as itemize the level of monetary peril within a business or venture assortment for a period of time. The technique is applicable in establishing as well as administering the risk level that black gold limited will assume. The main accountability is to ensure that risk are not taken further than the point at which the business will take up the loses of a practicable bad. In determining the significance threat of the company, the value at ri9sk considers the following key factors that bank deemed necessary to ascertain; the worth of likely loss, the possibility of that sum of loss and the time of credit lending. The bank of Indonesia will accordingly reconsider the value that will be awarded as loan to black gold limited so as to minimize the risk Where the bank is certain the collateral for loan is sufficient enough to cover the credit in incase of loan default, the bank can comfortably issue thrust amount of loan in full other, the bank will reserve the 15% credit risk in evaluating the state of affair of three company as well as the amount of loan to be awarded. Recommendation and Conclusion The financial report of the company provides an historic trend of the company business situation and the trend depict an irregular trend in profit and business trend. This tendency pose risk to the bank since, it is hard to conclude on the exact business. Performance of the company and thus it is difficult to generate a clear trend of the company performance. In this, regards, the bank as a plan of mitigating for risk, consider awarding the black gold limited loan up to 85% amounting to $4.25 billion dollar in order to cater for 15% credit risk. It is apparent that ratio analysis in the appendices provides that the bank is not having sufficient amount to pay back the loan and will consequently put the bank at threat. The loan will consequently be process subject to 85% contentment with 15% tolerable error that result of the forecast is certain that the collateral for loan will cover the amount of loan in case of credit default. The conclusion was reached out by the credit department after taking into account many factors that affect the black gold mine limited. The bank is 90% confident that the situation of the company will make the company pay the 85% loan request comfortably unlike the loan application at 100% given the business situation of the company. The risk variance that the resource of black gold limited will pretense and the prosperity ratio portraying the cash flow for the last past three financial years, estimates the anticipated tendency of the cash flow created by the company and consequently, the report on loan application process was concluded after detailed summary on the financial report of the company while adopting the above factors in order to conceptualize the clear impression of future business performance of black goldmine. References Anthony Saunders, L.A., 2001. Credit risk measurement; A new approach to valuing risk. Newyork: Jonh Willey;s % sons. Murphy, D., 2008. Understanding credit risk;The theory and practise of Financial risk. Lomdon: Cengage Learning. Sylvain Boutellie, D.C., 2012. The handbook of credit risk management. London: Cengage Learning. Appendices Black gold limited Ration Analysis A. Capital and liquidly ratio Capital Asset ratio= {Book value of equity/Asset} Year 2012 Year 2013 Year 2014 {1200/90150}=0.013 {1200/9872}=0.12 {1200/100870}=0.02 B. Risk variable; Profitability ratio 1. Net profit margin= {net profit/sales} Year 2012 Year 2013 Year 2014 {3062/39352}=0.08 {1830/46990}=0.04 {2590/52750}=0.05 2. Return on Equity (ROE) ROE= {Earning/capital} Year 2012 Year 2013 Year 2014 {3062/81150}=0.04 {1830/78950}=0.023 {2590/83420}=0.03 The graphical trend of the company’s financial statement Understanding the credit risk for Black Gold Ltd Year 2012 Year 2013 Year 2014 A. Capita asset ratio 0.013 0.12 0.02 B. Return on equity 0.04 0.023 0.03 C. profitability ratio 0.08 0.04 0.05 A. Risk variance of the loan Value at risk at 95% confidence level= {5%*5 billion=$250 million loss} Read More