Corporate lending takes many forms; from loans to small businesses to complex facilities for large international corporations.
Small Business Lending
Loans to small businesses are usually secured by their fixed assets and maybe the floating assets (stock and debtors) as well. Very often such lending is secured also by a guarantee from the principle shareholder, perhaps supported by a charge over the guarantor’s private house.
A banker’s favourite form of security is property, residential or commercial, for although values can fluctuate, over time values have tended to increase. More importantly, property is immovable, a security that is not only permanent but also capable of being valued, and re-valued.
Loans may be term loans for a period of years, with or without interim reductions, or repayable on demand. Alternatively, the finance might be in overdraft form and then always subject to repayment on demand.
Larger Company Lending
Corporate lending also includes lending to larger companies that give no tangible security at all: they have sufficient credit standing to command access to unsecured term lending; where the banker agrees financial covenants with the borrower, the breaking of which renders the loan subject to repayment on demand.
All banks produce internal lending manuals that set out their criteria for making advances. These are agreed by the bank’s board and discussed from time to time with the regulator. Some lenders are more risk averse than others but in my experience most banks operate in a prudent manner as regards their agreed policies even before the 2008 crash. Mistakes were made when there was a divergence from the agreed policies and this may have happened simply out of an individual’s ambition to out-do the competition of by simple ignorance of the bank’s requirements. Usually, not following agreed policies and procedures is a collective fault but occasionally it is the responsibility of a ‘rogue banker’.
Mistakes were also made in the way in which agreed facilities were offered to borrowers or in the way that professionals were instructed. Of course some errors were made by the professionals and this has given rise to the largest number of claims.
Errors were also made by the bank staff wrongly interpreting what it had set down in its own loan agreements, thereby allowing indulgence when it was not warranted. A bank seeks to protect itself from loss and it might be a fine judgment as to the best course to take when a borrower is unable to operate an account as anticipated.
In looking for reasons for loss, an expert is seldom presented with a cut and dried case where the bank is entirely right or entirely wrong: such cases tend not to come to experts: there tends to be faults on both sides, although not always so.
An Expert's Eye
An expert is able to examine the lending policies of a bank and comment upon their suitability, prudence and fitness for purpose. The expert then moves to see if the rules were obeyed, and where they were not, how the variance was addressed. Some excesses and exceptions might be quite reasonable and acceptable providing it is recognised as such, justified and agreed by those with authority in full knowledge of the position. Some suitable quid pro quo from the borrower might be necessary if a bank steps outside an agreed policy.
An expert is able to comment upon the way in which the agreed facilities are set up and how the professional advisers are instructed and whether all conditions precedent are met before drawdown and subsequently how the continuing conditions are adhered to.
When things have gone wrong, almost an inevitability given the expert’s instruction, an expert is able to examine the bank’s actions in recognising, or not, the borrower’s difficulties and deciding what to do to protect best the bank’s position as well as try to help the borrower if possible. These actions can be a matter of fine judgment.