STUDY ON BANK LOAN MONITORING MODEL FOR REAL
The CRIOCM 2006 International Symposium on“Advancement of Construction Management and Real Estate”STUDY ON BANK LOAN MONITORING MODEL FOR REAL ESTATEPROJECTFei XU, Shi Rong LI, Chao MAORCICEM, Faculty of Construction Management and Real Estate, Chongqing Univ., Chongqing, ChinaAbstract: As the real estate market and relevant policies are not so mature in China now, lots ofillegal practices appeared in the process of real estate development financing, this forces the banksto devote much effort to loan monitor. In this paper, how the banks should do to realize their loanmonitoring is analyzed by reviewing a series of bank loan monitoring policies, and the concreteoperation process of bank monitoring to bank loan and its rationality are also analyzed by studyinga case of Chongqing — Project-A. With these in-depth analyses, this paper will put forwards acomparatively mature model about monitoring procedure finally. The point of this research lies instandardizing the methods which the commercial banks can manage the loans effectively andkeeping healthy development of real estate industry.Keywords: Bank loan monitoring; Financing; Monitor policy; Case1Introduction1.1BackgroundAt present, bank loan occupies an important position in the fund structure of real estate developmentcompanies in China, the banks are still the mainly fund suppliers for the developers. From the “No. 121document” ( Notice about Enhancing Management of Bank Loan to Real Estate Development ) in 2003 tothe policies issued by the State Department to increase the ratio of owned capital of real estate developmentcompanies, all of these make the real estate companies confronted with risk of funds chain broken (Du Jiang,2003). The statistic of the first quarter of 2006 reveals that 58.4% of the developers in the 90 developmentcompanies of Chongqing under investigation deem “financing difficulty” is the chief problem.According to the “Chinese Real Estate Finance Report 2004”, the total real estate development funds isabout 1716.88 billion Yuan (News, 2005), deposit and pre-collected fund are the first important source whichare merely 739.53 billion Yuan, increase 44.4% than the last year and account for 43.1% of the investment;the second source of funds is the self-financing, which is about 520.76 billion Yuan, increases 38% andaccount for 30.3% of the total investment; the third fund comes from the banks which is about 315.84 billionYuan, increases 0.5% and account for 18.4% of the whole funds.While, there are so many bad loans in commercial banks according to the statistic of China BankRegulatory Commission (CBRC) in 2005 and the first quarter of 2006.Table 1 Statistic for bad loans by CBRCTimeFirst quarterItemsBad loansBalance18274.5Totalloansratio12.42005Second quarter Third quarterFourth quarter2006First oansratio8.6113124.7Totalloansratio8.03Bank loan takes a very important part in real estate industry. The development of real estate and the266
The CRIOCM 2006 International Symposium on“Advancement of Construction Management and Real Estate”development of the real estate financing are closely linked. Without real estate financial support, there is noreal estate sustainable development. However provided an excessive finance, the real estate market will go outof control (Case K.E. R. J. Shiller, 1996). The key is to make a balance between appropriate development andrisk control.1.2Research methodThis paper has made a certain qualitative analysis about the bank loan monitoring policies based on a series ofmonitoring policies issued by CBRC.Case study is another method adopted in this paper. By empirical analysis to a concrete case in Chongqingto find out its experience of success and educe a bank loan monitoring model adapted to the whole real estateindustry finally.1.3Purpose of this paperThe way of banks to deal with the loan monitoring at present in China is the “three-step” method (LiMingqing, 1995). Investigating before the loan is to make sufficient analysis and assessment to the applicationqualification and the feasibility of the project of the real estate development company. Checking when loanmeans to offer the loan according to the condition of the assessment. Superintending and checking after thecheck, that is to say, the commercial banks should follow and check the operation condition and the projectprogress after the loan. But the real estate development companies usually divert the fund or using the fund onother projects during the development, though the loans of the bank are offered according to the developmentproject, so it brings much difficulty to the monitor of the commercial banks, and causes enormous hidden riskto bank credit funds (Yu Wenda, 2001). This paper will analyze how the banks to realize the loan monitoringand put forward some concrete measures to reduce these risks, and shape a model for efficient bank loanmonitoring finally.2MethodologyThis paper adopts qualitative analysis method and case study method.(1) Qualitative analysis methodBecause the bank loan monitoring is affected by national policies directly, so we should do a qualitativeanalysis from the monitoring policies. This paper mainly analyzes according to “the Guidelines forCommercial Banks to Management Real Estate Loan”, “the Management Guidelines of Commercial BankGroup for Client Credit Risk”, and “the Guidelines for Realizing Credit Works of Commercial Banks” andother monitoring policies issued by CBRC.(2) Case study methodCase study will be very helpful to understand the concrete detail of bank loan monitoring directly. So thispaper also analyze the concrete operation process of bank monitoring to the real estate loan and its rationalityaccording to a concrete case of Chongqing — Project-A to make a abstract and complex monitoring processconcrete and clear.3 Analysis on Bank Loan Monitoring PoliciesThe nonstandard character of real estate industry induces the state to regulate the real estate market by a seriesof policies concerning to land and finance etc (Lin Ping 2000). The State Department increases the ownedcapital need for real estate development which should account for 35% of the investment. The CBRC alsoissues a series of loan monitoring policies, such as “the Guidelines for Commercial Banks to ManagementReal Estate Loan”, “the Management Guidelines of Commercial Bank Group for Client Credit Risk”, “theGuidelines for Realizing Credit Works of Commercial Banks” and other monitoring policies (WangZhaoxing2004). These policies are mainly focus on how to standardize the methods and means which the267
The CRIOCM 2006 International Symposium on“Advancement of Construction Management and Real Estate”commercial bank can manage the real estate effectively, at the mean time, offer and introduce best method inorder to discern, weigh, monitor and control effectively to the risks confronted with the banks (Chen Lu2005).3.1The influence of monitoring policies to real estate market(1) “Fake mortgage” will be kept within a certain limitsThe risk of “fake mortgage” is a problem which can not be ignored (Cole F. A, G. W. Fenn, 1994). In order tosettle the risk of “fake mortgage”, the fifth chapter of “The Guidelines for Commercial Banks to ManagementReal Estate Loan” standardizes the criterions of applying documents, the content of the risk evaluation reports,the roundly analysis to loan application, and regulation about investigation of each loan. All of theseregulations are powerful guarantee to keep away “fake mortgage”.However, some terms of “The Guidelines” still have some deficiencies. For example, in fact, there is onlyvery few banks which can investigate the record of each loan roundly (Wu Xiaoling 2000). Besides, it’s hardto weigh the repayment capability of debtors, and to make sure the authenticity and reliability of thedocuments.While, there is no doubt that “The Guidelines” has kept the “fake mortgage” within limits, and once it iscarried into execution, the “fake mortgage” will be reduced (Zhou Xudao, 1994).(2) The quality of newly increased loan for real estate development will be improved, while the speed ofincreasing will slow down.As the doorsill of bank loan to developers will become higher (Berger, Allen N., Frame, W. Scott 2002), thequality of the newly increased loan will be improved accordingly, at the same time the speed of increasingwill slow down. Some of the loans to real estate will be kept away outside of the bank after the issue of “TheGuidelines”, besides, the monetary policy tends to be tightened, this leads the sum of loan comparatively lessand the increase speed of loan will slow down.(3) The quality of stocked loan has decreased, and the rate of bad loans may go up.The issue of “The Guidelines” makes it clear that the existence of stocked real estate loan makes the doorsillof loan is too low and the procedures are nonstandard. And these problems unfurled gradually along with theself-examination and self-correction of the commercial banks, and finally come into being new bad loan.According to the regulations of People's Bank of China, the mortgage loan adopts fluctuant rate which isregulated year by year (Diamond D, 1990), it means that if the interest increased the lending rate of next yearwould have to become higher, that would aggravate the burden of banks’ debtors and they would have to payhigher sums of interest than the year has no interest increase. If the degree of increasing interest exceeds thedebtor’s affordable capability or their wishes, it probably leads to breach of faith.3.2The monitoring policies guide the practicesThe banks should know the relevant policies well before lending money to the real estate developmentcompanies, and investigate and evaluate the project before offering loans (Malpezzi S, 1995). After the projectis permitted, the bank should be in a station of initiative at the beginning of the loan, so as to assure the risk iscontrollable in certain degree.The following issues should be focused on:(1) Early investment should be decided probably, and adjusted according to actual conditions when comeinto sale (Chan, M.W. 1987). There is no need to offer investment at one time, it can be adjusted dynamically.(2) The construction company of the project should open an account in the bank.(3) Contract with the real estate development company, so as to make the banks to be initiative in thecontrolling.3.3“Three-step” method of the policy emphasizedAt present, because the immature policies and single banking system as well as competitions among the268
The CRIOCM 2006 International Symposium on“Advancement of Construction Management and Real Estate”financial banks, which makes the efficiency of banks’ monitoring low. According to the present situation, thelending banks should strengthen the “three-step” method of loan monitoring（Li Hongzhao, Liu Tie. 2000）.3.3.1Investigating before the loanThere are no other financial methods except the support of bank loan to the development of real estateindustry, and the single banking system makes the banks confronted with large risk (Xu Yan, Zhang Pingyu,2005). Therefore, the banks should change their mind, take positive monitoring measures, check and analyzeaffiliated companies about relationship between ownership and management, debtor-creditor relationship, andhow the fund to be used in an all-round way, checking the way of fund dispatching, examining companies andcompany's documents to assess whether it is rational and accurate, as well as the situation of affiliatedcompany who offers guarantee.3.3.2Checking up when loanStrict checking up is the critical part to ensure the offer of the loan correctly and reasonably (Dulcy A.M, 1990).The content mainly involves:(1) The authenticity of financial report forms.(2) Whether the capital meets the need of the project.(3) The time limit of the project matches the time limit of the loan.(4) Whether the real estate companies increase the rate of self-possessed capital by themselves.(5) Make sure whether the real estate companies overate the value of the guaranty.3.3.3Superintending and checking after the loanStrengthen the management after the loan is an important part to control the lending risk，as we all know, onlyafter the credit business contact , can the banks know much better their customer's actual conditions muchmore deeply and roundly. So generally ten days after the credit operation, the banks will check the operatingcondition of the fund, check the flow of the fund, pay a closely attention to the unusual developments ofcompany's production and management as well as the financial situation, monitor the credit condition ofcompany's investors and main administrative staff tightly, and control the related trading activities among theaffiliated companies tightly to prevent the non-normal transformation of the assets and profits.With the works mentioned above, can basically realize the fund to be controlled in the overall process, andprevent developer's defaulting subjectively or objectively, and reduce the loan risk of the bank.4Case Study4.1Background of project-AProject-A lies in the Chongqing Gaoxin Development District with land of 150,000 square meters. The totalfloor area would be 207,667 square meters after completion.4.2The commercial bank’s considerations in financial supportAfter the real estate company meets all basic requirements of commercial bank for the appointed project, thebank will carefully examine the following factors before it approves to offer the loan.4.2.1Credit and financial condition of the borrowerThe analysis is to investigate and review the borrower’s business situation in a comprehensive way,269
The CRIOCM 2006 International Symposium on“Advancement of Construction Management and Real Estate”asset-liability ratio, repayment ability, and credit condition and development prospect.Table 2 the credit condition of the borrowerUnit:10,000 Name of itcondition10,000 YuanChongqing D(Called “D” instead) Real Estate Development Limited CompanyFoundation yearDevelopment GradeEngineering completion peryearProduct qualityEnrolled capitalTotal assetRation of asset and liabilitiesStock turnoverLoan in A bankLoan in other banksCredit classCredit scoreFinancing limited Development Scale per yearSales scaleper year10080Actual capitalOwner rightLiquidity ratioProfit of last yearRepaymentRepayment record16000156162.12475NormalThe company is a newly-built real estate company. Although it has no credit relationship with bank A, itsrepayment record in other banks is sound.4.2.2The project general situation and evaluation of the construction situation(1) Basic condition of the project (location, function, main construction index, total investment anddevelopment period)Project-A is about 10km far from downtown. The project is planned to be built in two periods withconstruction land 15,497 and total floor area 232,000 : living residence 189,000 , business housing5,756 , parking place 33,000 and public place 3,904 . The green land occupies 36% of the land.(2) Construction conditionD Real Estate Company has obtained the land-usage and construction land certificate of the whole project,and construction planning certificate of 72,734 and construction certificate of 72,734 .(3) Construction processOn the site, the chamber is partly completed, 3 buildings are nearly completed and another 2 buildings are inprogress.(4) Design, construction part and monitor partProject-A is designed by the British Construction Design Company -- Aterkims, which is famous for itsproduct of a seven-star hotel in Eastern Asia. Construction companies include the Chongqing 7th constructioncompany, the Chongqing 9th Construction Company and Yufa Construction Company. The supervision unitis Chongqing Construction and Science Supervision Company, which is graded as first class by constructiondepartment.4.2.3 Evaluation of market condition of the project(1) Investment environmentAccording to the government city development plan, in the next ten years, 20 million square metersdevelopment will be required each year, which shows a great potential market. The more, the price of thehouse is about 2300Yuan/ ,which is quite competitive compared with the average price of 2708Yuan/ .270
The CRIOCM 2006 International Symposium on“Advancement of Construction Management and Real Estate”(2) The orientation of the projectThe main style of the buildings of the project is multilayer building. The price is about 3600Yuan/ .Compared the similar project nearby, the price is not high.(3) Cost analysisThe total cost of the project is about 237,840,000Yuan including 21,780,000Yuan (9.15%) for land,93,840,000Yuan (39.5%) for construction and installment and 63,580,000Yuan (26.7%) for basicinfrastructure. The cost for each construction land is about 2,271Yuan/ , and it is reasonable.(3) Competitive power of the projectThe project is first British style housing project which is very attractive for middle and upper class consumers.The developer invests amount of money in construction material, design and sights on the project in order toassure the quality of the project.The good location, competitive price, reasonable cost, and attractive style all herald a good sale.4.2.4The evaluation of investment and financing planAccording to project evaluation, the total investment of the Project-A is about 237,842,000Yuan includinginvestment of development and construction 228,242,000Yuan and running expenses 9,600,000Yuan.Table 3 Financing planUnit: 10,000YuanInvestment demandTotal investment23,784.24.2.5Own funds8,500Sources of fundsPre-sale and pre-rentBank loan4,50010,000Other sources0The confirmation of basic financial dataThe construction period of project: 3yearsThe running period of project: 20yearsThe evaluation of the cost of development product:Cost of housing: 172,090,000YuanCost of office room: 12,550,000YuanCost of garage: 43,590,000YuanEvaluating the cost of sale and rent (market comparison way):Sale price: 3,600Yuan/ in 2004, 3,700Yuan/ in 2005, 3,800Yuan/ in 2006 and 2007Rent price: 30Yuan/ Evaluation of project income:Income of sale: 283,481,000YuanIncome of rent: 74,604,000Yuan4.2.6Financial performance of the projectAnalysis of profit-gaining ability:Profit rate of project investment: 27.3%Profit rate of project sale: 18.13%Financial net present value: 22,162,000YuanFinancial internal profit: 14%Repayment period of loan: 2.89years271
The CRIOCM 2006 International Symposium on“Advancement of Construction Management and Real Estate”4.3 Evaluation of bank benefit and anti-risk measures4.3.1 Bank benefitDirect benefit: If 100,000,000Yuan is offered, according to the real estate loan management, the loan will berepaid after the sale is realized. So the actual repayment period is not 2.89years. Supposing the period is1.5years, the loan interest income is about 9,058,500Yuan.Indirect benefit: The principle account will be transferred to the bank. D Company promised to cooperate inthe field of personal mortgage loan, electronic banking and investment banking activities with the bank.4.3.2 Potential risks and anti-risk measuresPotential risks:The main risk of the project is market sale and national macro-regulation policy. Because the governmentenhances the macro-regulation, this will influence the sale of market. If the sale slows down, a bank may facethe problem of overdue.Anti-risk measures:(1) The bank plans to manage the loan in the way of blocking out by controlling the sale income of theproject.(2) To take the stock of D Company and D’s mother company as guaranty.(3) To ensure 35% own funds of D company to invest on the project(4) To master the income and repayment conditions of D company.Through the case study, we can say Project-A is in line with the current industrial policies of the nation anddevelopment strategy of Chongqing. It also conforms to the lending policies of the banks and is expected to beprofitable under normal operation. Although the project carries potential risks and unpredictable factors,effective anti-risk measures and sound bank management can ensure the feasibility and profitability of thisproject.5Model DevelopmentBy the analysis of bank loan monitoring policies and the case study, we can find that the key of good monitorand management of the loan to real estate is that the commercial bank should monitor the capital ofdevelopers. Except for the routine “three-step” examinations, the commercial bank should also reinforcemonitoring and managing the process of the project, so this paper construct this model to guide the banksrealize effective loan monitoring:Table 4 Monitoring processes of commercial bankWith different dhousesDevelopment stageRepaymentoutPre-sale and sale stage272SoldTransfer stage
The CRIOCM 2006 International Symposium on“Advancement of Construction Management and Real Estate”(1) Sign the contract with the developers, and provide the first loan on the premise of that the developersprovides their land to the commercial banks as guaranty. When the developer gets the permit of pre-sale, heshould mortgage the finished house too, that is to say, the developer should take all the property for guarantee.Thereby, it will make the bank strongly control the risks of the loan.(2) At the stage of sale, the bank will require the developer to repay the loan in proportion according totheir income. This project takes 30% of the average income of the sale to repay the loan, and in order to makesure that the developer can go on with their project without delay and have the capability to repay the loan intime in later period of the project, the bank adopts the method which permit the developer to repay the loanwith less proportion in prophase and more proportion in anaphase of the project. In this project, in the firstyear 10% of the sale will be used for repayment at the first half year, 20% of the sale will be used forrepayment at the second half year. In the second year, 50% of the sale will be used for repayment, and theloan will all be repaid at the time of 80% of the project is finished. Not only is the normal development ofdeveloper guaranteed, but also a safeguard for the bank to get the loan back.(3) The commercial bank controls the stage which the developer transfers houses to the customers. In theprocess of purchasing houses, the customers will have to go through the procedures for transfer, at the sametime they must check whether the house has been mortgaged to the banks, if it was, the customer should askthe developer to release the mortgage from bank, and otherwise the developer can not sell the house to them.This approach not only assures the benefit of customers, but also is effective to the bank to monitor thedeveloper.With the model mentioned above, the banks can monitor the developer at the whole process, thus ensurethat the banks can control the risks of the loan and the developer will repay in time.6Conclusion and SuggestionAccording to the policies issued by the state and financing condition at this stage, in order to improve themonitor level of bank and to reduce risk, the banks should: (1) Comply with the relevant regulations of CBRCand execute operations strictly to Strengthen the monitor of the loan; (2) Taking full advantage of the creditregister consulting system to control the credit support strictly to the real estate development companies; (3)Establish risk pre-alarm system to exclude and guard against investment risk ; (4) Evaluating the qualificationof real estate development company must be strict, and do not issue loans to the company whose ownedcapital is less than qualification; (5) Strengthen loan callback and the disposal of guaranties; (6) The lendingbanks should know well about the rule of real estate development companies how to use their fund, and offerthe loan according to project progress strictly, and the banks should also track and control how the loan isused, pay construction fee to the construction company according to the contract to solve the problem ofdefaulting. With these measures, the banks could strengthen loan monitor or control and mature themechanism of loan monitoring to secure the healthy development of real estate industry.References:Berger, Allen N., Frame, W. Scott (2002), credit scoring and the Availability, Price and Risk of Small BusinessCredit, Working paperCase K.E. R. J. Shiller. (1996), Mortgage Default Risk and Real Estate Price: The Use of Index-Based Futures andOptions in Real Estate. Journal of Housing ResearchChan, M.W. (1987), The Monitoring of Construction Project for Financial Institutions Engaged in ConstructionProject Finance. Unpublished M.Sc. dissertationChen Lu (2005), Lender’s Consideration in Financing Real Estate Projects in Chongqing. Development Financing& Investment.Cole F. A., G. W. Fenn (1994), Dad Commercial Real Estate Lending Cause the Banking Crisis? Real EstateFinanceDiamond D (1990), Monitoring and Reputation: The Choice between Bank Loans and Guidingly Placed Debt.Journal of Political EconomicsDulcy A.M. (1990), State-based Framework Using Indicators for Construction Monitoring and Evaluation.273
The CRIOCM 2006 International Symposium on“Advancement of Construction Management and Real Estate”Unpublished PHD dissertation, University of Maryland, U.S.ADu Jiang (2003), the Way of Financing, the Real Estate In and Out of ChinaJiao Jinpu (2004), the Financing in China should learn from Other Countries. The China Real EstateLi Mingqing (1995), Project Financing Monitoring for Real Estate Development in Hong Kong. Unpublished finalYear dissertation for the degree of B.Sc. in Building Surveying of Hong Kong PolytechnicLin Ping (2000), Thinking About the Policy and Theory in Financing Monitoring. Financing and InsuranceMalpezzi S. (1995), Credit Union Real Estate Lending and Real Estate Losses. University of Wisconsin, Center forUrban Land Economics ResearchWu Xiaoling (2000), Finance Monitoring and Credit Evaluation. http://www.drcnet.com.cn/Wang Zhaoxing (2004), the Newest Development of Bank Monitoring. Monitoring WindowsYu Wenda (2001), Financing: Contrary with International and China’s Choice. China Financing PressZhou Xudao (1994), the Monitoring Policy in Developed Country. Journal on Financial Theory and Practice274
STUDY ON BANK LOAN MONITORING MODEL FOR REAL ESTATE PROJECT . According to the “Chinese Real Estate Finance Report 2004”, the total real estate development funds is about 1716.88 billion Yuan (News, 2005), deposit and pre-collected fund are the first important source which . 1995). After the project is permitted, the bank should be in a .
6. Loan geography 8. 7. Contractual cash flows for each loan or pool of loans Risk System Data: 1. Loan classes and grades 2. Modification history by loan class 3. Loan renewal and funding history by loan class 4. Loan prepayments history by loan class 5. Loan cash flows not collected 6. Loan grade LGD and PD rates 7. Loan grade charge-off history
Community Banks( 3B) vs. Regionals( 20B- 100B) Loan Yields vs. Market Rates Attendee Submitted Loan Pricing Case Studies Community Bank ROE and Loan ROE Trends Loan Pricing in a Rising Rate Environment . 5 TRENDS 6.44 5.09 5.11 4.75 5.25 5.75 6.25 6.75 Loan Yields Community Bank Loan Yields Regional Bank Loan Yields
Northern Bank & Trust Co. Patriot Community Bank People's United Bank Pilgrim Bank Radius Bank RTN Federal Credit Union Santander StonehamBank TD Bank The Cooperative Bank The Savings Bank The Village Bank Walpole Cooperative Bank Wellesley Bank Winchester Co-operative Bank Abington Bank Bank of Canton Blue Hills Bank Boston Private Bank & Trust
M/s G.M. Kapadia & Co., Chartered Accountants Bankers HDFC Bank Ltd. (Primary Banker) Axis Bank Ltd. Bank of Baroda Bandhan Bank Ltd. Citibank N.A. CSB Bank Ltd. DCB Bank Ltd. Deutsche Bank ESAF Small Finance Bank ICICI Bank Ltd. IDFC Bank Ltd. Indian Bank RBL Bank Ltd. Saraswat Co-op Bank Ltd. State Bank of India Suryoday Small Finance Bank Ltd.
Loan product - select the type of loan. Basic Home Loan - Get back to basics with our no-frills, variable rate home loan - low interest rate, fees and stress. Flexible Home Loan - Customise to your heart's content. With options to fix, split or offset, you can create a loan to fit your lifestyle. Loan purpose. Primary purpose.
10. HDFC Bank Limited 11. ICICI Bank Ltd 12. Indian Overseas Bank 13. ING Vysya Bank 14. Kotak Bank -Virtual card 15. Shivalik Bank 16. Standard Chartered Bank 17. State Bank of Bikaner and Jaipur 18. State Bank of India 19. State Bank of Mysore 20. State Bank of Travencore 21. Syndicate Bank 22. The Federal Bank Ltd 23. The Karur Vysya Bank Ltd
WHEREAS (A) by a loan agreement between the Bank and the Original Borrower, dated July 21, 2008 (the Original Loan Agreement), the Bank made a loan to the Original Borrower in an amount of seventy million Euro (EUR 70,000,000) (Loan 7532 MK) (Loan) on the terms and conditions set forth in the Original Loan Agreement;
last loan of a loan sequence. For more than 80% of the loan sequences that last for more than one loan, the last loan is the same size as or larger than the first loan in the sequence. Loan size is more likely to go up in longer loan sequences, and prin
