Lending according to Manoj Akmeemana: A textbook for all

Lending, Book Author Manoj Akmeemana

It has been observed by many veteran bankers that there has been a gap in the knowledge and understanding of the dynamic side of lending by both bankers and those who sit opposite to them, borrowers. The book is an attempt at eliminating this gap. Hence, according to the author, it will help a wide gamut of the people in the chain to understand the first principles of lending. They include young and veteran lenders, banking and financing professionals, members of boards, academics, and students of business and commerce, and borrowers, existing or prospective and so on. Hence, Lending should naturally be everyone’s reference book

A new book on lending

Veteran banker, Manoj Akmeemana, has chosen to share his decades long experience in banking and lending with bankers, students of banking and the public in the form of a comprehensive text under the title ‘Lending: Concepts, Theory, and Practice’. The book has been produced by using modern technology of producing such texts – two colours, graphs, flowcharts, and tables to make it user friendly. Insight capsules – box articles in other cases – have been added to elaborate on specific topics. 

The thread-bound book in hard cover will ensure that the readers could use it for many years without running into the problem of offensive disentangled dog-eared pages which readers encounter in paperback books. But it has come in a hefty price of Rs. 4,500 (equivalent to about $ 15) which may make it only a reference book in libraries and not by many ordinary individual users.

Sharing decades long experience

The purpose of publishing the book has been explained by the author in the Preface as follows: “Over three decades of my banking career, I have extensively dealt with lending to personal clients, small and medium enterprises, mid-corporate, and large corporations. I had the opportunity to interact with many borrowers all over the country. My visits to different parts of the country exposed me to different arrays of industries and business which fascinated me as well as enlightened me on the dynamics of various businesses.” 

It has been observed by many veteran bankers that there has been a gap in the knowledge and understanding of the dynamic side of lending by both bankers and those who sit opposite to them, borrowers. The book is an attempt at eliminating this gap. Hence, according to the author, it will help a wide gamut of the people in the chain to understand the first principles of lending. They include young and veteran lenders, banking and financing professionals, members of boards, academics, and students of business and commerce, and borrowers, existing or prospective and so on. Hence, Lending should naturally be everyone’s reference book.'

Ten important chapters

Lending is presented by Akmeemana in 10 chapters which have been divided into subtopics coming under each main lesson. Chapter 1 has introduced the reader to the basics of lending that involves the characteristics of the lender as well. Chapter 2 is concerned with different types lending products offered to customers by lenders. Chapter 3 has talked about the other side of the lenders, namely, the borrowers and different types of borrowers in the market. Chapter 4 has taken the readers to more complex technical side of lending such as financial analysis and techniques of lending. Chapter 5 is about humane and social side of lending, namely, the non-financial considerations and the techniques involving the employment of such factors in lending decisions. 

Chapter 6 is a detailed presentation of the collateral that is insisted by lenders when granting loans. Chapter 7 has presented the methods of structuring a loan product. Chapter 8 is on how a lender should manage risks involved in lending. Chapter 9 has talked about how lenders should manage loans that have become sour. Chapter 10 is on an ethical code that should be followed by a lender. Each chapter begins with an outline of the learning objective of the material that follows with pertinent quotations of authorities to add additional appetising flavour to the readers. Akmeemana has very carefully chosen these quotations to make the maximum effect in the readers.

Use of appropriate quotations

Some of these quotations are worth being mentioned here. Everybody believes that money is a God, and that divine power will solve all our problems. But a quotation by Benjamin Franklin, drafter of the US constitutions, which says that “If you would know the value of money, go and try to borrow some” would certainly bring the reader who relishes himself in an imaginary heaven down to earth. The Chinese war expert Sun Tzu’s saying that one should know the enemy as well as oneself to succeed in battle is an advance warning to the banker: before he starts lending, he should know the status in the bank as well as the type of customer he will meet in the loan negotiations.

Another piece of advice which Akmeemana has given to his banker readers is a quotation from Robert J. Shiller. This Nobel Laureate in economics who has recently added a new branch to the science of economics called narrative economics has in no uncertain terms said that the broad goal of finance involves not merely making money but what that process contributes to society. This should be at the heart of a lender.

The entrepreneur Seth Godly has advised us that we should not consider everyone as our customer. This means a lender should make a considered choice and as advised by the public speaker Jeffery Gitmor, he should know every stuff about the customer. This reminds us of the careful review of a prospective borrower by an informal money lender before he approaches a customer with a loan proposal. He uses what is known as ‘the eyeball test’ to make an onsite assessment of the business, its potential and the ability to repay as agreed. These are pieces of wisdom which a lender should follow.

A lender may tend to rely wholly on the good results of the financial analysis made of a borrower’s business. But Warren Buffet, godfather in investment, has said that the financial analysis is only the beginning and not the end of business valuation. The moral of this quotation is that the lender should consider non-financial factors also into consideration before choosing a borrower and he should be subject to continuous review during the currency of a loan. This has been strengthened by Steve Odland who has said, as quoted by Akmeemana, that “You have more independent eyes scrutinising the decision-making and financial statements of companies”. This means that eyeball tests adopted by informal money lenders should be replicated by formal lenders too. They should have not two eyes that looks in the forward direction in combination; but additional four eyes, one at the back, two on either side of the face, and a last that equips him with a six sense. It is a 360º plus view of the lending world.

Everybody believes that money is a God, and that divine power will solve all our problems. But a quotation by Benjamin Franklin, drafter of the US constitutions, which says that “If you would know the value of money, go and try to borrow some” would certainly bring the reader who relishes himself in an imaginary heaven down to earth. The Chinese war expert Sun Tzu’s saying that one should know the enemy as well as oneself to succeed in battle is an advance warning to the banker: before he starts lending, he should know the status in the bank as well as the type of customer he will meet in the loan negotiations

Non-financial techniques

In the chapter on non-financial techniques relating to credit analysis, Akmeemana has said that there are many factors affecting a business and all these factors should be captured to make an accurate assessment of the sustainability of the business. There are models developed by experts to help capture those non-financial factors and the lender should be conversant with them fully before he embarks on his journey. He has presented a few of such models that helps a lender in this exercise. The factors he has elaborated on have been abridged to the easy-to-remember acronym of PESTLE standing for political, economic, social, technological, legal, and environmental factors.

He has also introduced the lenders to the often-used SWOT analysis covering the strength, weakness, opportunities, and threats faced by a business. His Insight Capsule on analysing paddy cultivation and rice milling is, in my view, a comprehensive treatment of the subject. It has been presented by using graphical, picturesque, and flowchart techniques to make it more reader friendly. He warns that the lender should make as many calculations as possible if he wants to succeed in business. His quoting of Sun Tzu is most appropriate in this connection: “The Generals who win the battle make many calculations in their temple before the battle is fought. The General who loses makes but few calculations beforehand”. But when choosing materials for those calculations, the lender should consider only those factors that matter, as advised by the Hungary-born American investment manager Laszlo Birinyi. A pragmatic lender cannot consider all the factors under the sun for making his decision but select those which are the most appropriate having regard for cost, time, and accuracy.

Safety or unsafety of collateral

In the lenders’ usual manual, collateral is the first guard for loan losses, whether it is formal or informal money lending. The chapter on collateral for lending begins with a quotation by an unknown advisor that “security is not a reason for lending”. Alice Walton, heiress to the fortune of Walmart empire, too advises that one of her responsibilities is to manage her fortune to create value implying that management is more important than other safety factors. Writing on the same line, American banker and author, Charles R. Morris has said, as quoted by Akmeemana, that credit is the air that is breathed in financial markets and care should be taken not to allow it to be poisoned because once it happens, the lender will not have a place to hide. This preamble tells us that collateral is necessary and useful, but a lender should not wholly rely on it when making lending decisions. His technical presentation of collateral is subject to these pragmatic considerations.

Proper structuring and risk management

Lender, not being a philanthropist, is in the business of lending and his prime consideration is to recover his money with a fair rate of return. The adherence to that principle only will ensure his continuation in business. In the opposite pole, the borrower’s interest is to make use of the borrowed money for the betterment of his business. Hence, lending facilities should be structured by a lender in a way to satisfy the desires of both parties. In the chapter on structuring lending facilities, Akmeemana has provided a detailed structuring strategy package for use by the lenders. It is necessary to put the strategy into action and, as the management Guru Peter Drucker has put it, it is an art which has been reinforced by American Management Association by advising its members that appropriate decision-making should be done to put strategy into action.

The business side of loan structuring makes the lender a scientist; the artistic side of loan strategising makes the lender a creative person. Therefore, as Akmeemana has elaborated, the lender should wear both these hats if he is to realise the goals of both 

parties. 

It requires the lender to mitigate risks properly as presented by Akmeemana in chapter on risks of lending. He has quoted the former Federal Reserve Chairman Alan Greenspan aptly: “Indeed, better risk management may be the only truly necessary element of success in banking”.

He has also quoted the American Aviation Safety Pioneer cum engineer Jerome F Lederer as follows: “Risk management is a more realistic term than safety. It implies that hazards are ever present and that they must be identified, analysed, evaluated, controlled or rationally accepted”. The risk management techniques which Akmeemana has presented in this chapter are based on this foundation.

Handling bad loans

The chapter on infected portfolio and recovery management is concerned about the bad side of lending, namely, what can be done if the loans go in the wrong direction. He has given, in generic terms, why a loan may go bad. There are three such reasons: the lender’s fault, borrower’s negligence, and the country 

going sour.

The lender might make so many mistakes like overidentification of the creditworthiness of the borrower, overreliance on collateral ignoring the cashflow developments, improper structuring of the loan, to mention but a few. The borrower may cause the loan to go bad by not having ability to repay or willingness to repay. The country going into a crisis or recession coupled with political instability will put an unintended pressure on a lender to collect his dues.

He has given details of how such bad loans should be managed. There should be an early warning system to identify impending loan defaults. The lender should closely monitor the borrower for the emergence of trigger points that would cause the borrower to default his loan. But once the loan has become bad, the job of the lender is to revive the loan. For this purpose, Akmeemana has suggested the establishment of nursing or revival units within the business of a lender. It will provide, he says, the right focus, expertise, and skills-base to handle such loans. But if everything goes wrong, it is the debt recovery via litigation that is available for lenders to protect their money. The problems associated with such litigation processes have been presented in detail by Akmeemana.

The entrepreneur Seth Godly has advised us that we should not consider everyone as our customer. This means a lender should make a considered choice and as advised by the public speaker Jeffery Gitmor, he should know every stuff about the customer. This reminds us of the careful review of a prospective borrower by an informal money lender before he approaches a customer with a loan proposal. He uses what is known as ‘the eyeball test’ to make an onsite assessment of the business, its potential and the ability to repay as agreed. These are pieces of wisdom which a lender should follow

Deficiencies

The book on lending is a worthy contribution to Sri Lanka’s lending field. However, I find three deficiencies in the present edition. One is the typos that have penetrated the text due to, maybe, hasty proofreading. Another is the non-inclusion of a glossary of terms that provides the reader with a quick reference facility to understand the meaning of the terms used. The third is the omission of an index for the book. I hope Akmeemana will address to these deficiencies when he comes up with a second edition of the book.

I recommend Akmeemana’s lending to all the readers.

Pix by By Ruwan Walpola

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)