The terms that bank relationship managers use when rejecting your loan application can be perplexing… until you know what they really mean. Photo credit: Pexels
If you could never make any sense of the business loan jargon used by banks (especially when reviewing your application), help is here.
We have decoded some of these terms for you with the help of two experts — Mr Victor Chang, a Sales Manager from CIMB Bank Singapore’s Commercial Banking unit; and a Relationship Manager from Citibank.
Mr Chang (CIMB): This is when a company has too many existing liabilities (e.g. loans facilities) with financial institutions (FIs). Most FIs would mitigate credit/default risk by practicing prudency in lending to a company with excessive liabilities.
Hence, if your company is overgeared in terms of loans, you might want to calculate a comfortable monthly repayment amount.
Citibank: DSR stands for Debt Servicing Ratio. Some banks might call it DRR (Debt Repayment Ratio) or DSCR (Debt Servicing Current Ratio).
This is calculated differently across different FIs, but in essence, it is the company's inflow of cash against its regular debt servicing. This can be calculated on a monthly basis (using bank statements where monthly credits are summarized at the end of the month) or on a yearly basis, using financials (typically under the cash assets and financing segments).
If the ratio is more than 1.0, it generally shows that the company is able to retain more cash than it is spending for loan repayments. Most banks prefer a higher ratio of 1.20-1.25.
This can be difficult for a customer to calculate, as FIs generally have Excel calculators to generate this number. But the concept of debt servicing ability should be understood by the borrower.
Citibank: Collaterals refer to any form of security the bank has in the event that a loan is defaulted upon.
For example, if a fixed deposit (FD) is pledged as collateral for a loan, it would mean that the FI has the right to take out the defaulted instalments from this FD. Or if a property is pledged, the FI has the right to take over the property.
While the common understanding is a fixed security such as the examples above or even a motor vehicle, a personal guarantee (PG) is also a form of collateral, which is common in unsecured lending. This means that the FI has the right to claim the debt from the person and their next of kin by law.
Depending on risk ratings of borrowers, FIs might ask for fixed securities on top of personal guarantees.
It is important to note that risk appetites between FIs can vary greatly, and in the SME market, PGs are almost always required, even if the borrower has strong credit standings or fixed securities.
Mr Chang (CIMB): If this is referring to bank statements, it could mean that a potential borrower’s total debit transactions (cash outflow) are more than his or her total credit transactions (cash inflow).
Citibank: This is similar to DSR, but includes the running costs of the company. Generally, if a company is not selling its goods or services at a loss, and is able to service its loans regularly, this would be positive, with the output being < input.
Note that some FIs take this a step further and factor in FCC (Financial Current Commitment), which is a measure in months of how long a company can continue to operate, assuming a complete stop in business.
For example, a company with an FCC of 3 can operate for three months continuously without any incoming funds. This is generally calculated on an average of the last six months’ bank balances against the monthly expenditure.
Mr Chang (CIMB): This is also known as UBO (Ultimate Beneficiary Owner) — or someone has the actual power and authority to direct a company, and more often than not, receive and reap the benefits of owning the company.
For most SME structures, the UBOs are the direct shareholders as listed on the Accounting and Corporate Regulatory Authority. If necessary, the bank will ask about the second layer of shareholders, and so on.
Citibank: This refers to the owner of a company. For example, if Company A has 80% of its shares owned by Company B, and the remaining 20% owned by an individual, the owners of Company A would be considered to be the Ultimate Beneficiary of Company A's business.
This is important when PGs are needed. In this example, assuming the FI requires 50% of shareholding as PGs, a calculation would need to be performed to ensure that at least 50% of Company A's shareholders sign as guarantors for any facility.
Mr Chang (CIMB): Besides assessing the company, FIs also use the Balance-to-Income (BTI) ratio to help individual borrowers avoid accumulating further debts. FIs may not grant further unsecured credit to an individual whose BTI ratio has been exceeded 12 times (since 1st June 2019 to the present) for three consecutive months.
This implies that a FI cannot allow further disbursement of existing limits, approve credit limit increases, or grant new facilities to such borrowers.
Citibank: When used in a personal loan or credit card context, this means that an individual’s total unsecured interest-bearing debt exceeds his or her allowable BTI limit.
The BTI ratio is calculated by adding the total unsecured interest-bearing balances across all FIs divided by your monthly salary.
Depending on the risk appetite of the FI, if an individual's debt crosses a certain BTI level, lending facilities may not be granted to the company the individual owns.
Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.