There is a lot of buzz of going to top B-schools, primarily IIM’s in India. One of the most sought domains that students pursue in their 2 year of PGP/MBA program is finance. There is never an end to finance roles be it in banks, NBFCs, fin-tech companies, Startups, Private Equity Firms, Investment banking, venture capitalist, debt fund, mutual funds and the list goes on. This is supported by the amount of pay packages that these roles offer increasing vertically i.e. from back end roles in finance to front end roles and horizontally i.e. when you transition from banks to investment banking to startups/private equity firms (subject to negotiation :P). Let us talk about banks which recruit a lot of candidates from the B-school.
While applying for my internship in the first year of my B-School (IIM Indore, to be precise), I also had an inclination towards finance primarily because (a) financial models interested me (b) I could make sense of stock market, correlate it with the business news and (c) I had already worked in operations (automobile industry) for some time, marketing and HR were not really of interest and so the option where I could grow out of my hard work and interest was finance and (d) there was influence of lot of movies in my brain where the protagonist slogs and comes up with a trading strategy that fetches him tons of money, early retirement, and what not.
The knowledge I lacked and the reason why I am writing these articles (4 part series) is a lot of us don’t know what happens when you join a bank’s corporate banking department, what are the different profiles available, what is the nature of work, what is a day like, how much of finance do we actually end up doing and other questions.
Welcome to the world of corporate banking!!!!
Corporate banking, for a starter is similar to retail banking (where a customer walks in for an application of availing personal loan, car or house loan and is assisted by a relationship manager). Corporate banking is centered around companies (for start, let us consider companies which are not in stress or facing any bankruptcy and have normal running operations) which are often segmented based on their annual turnover into small, medium, large and there may be segmentation based on large groups (Tata, Reliance, Mahindra etc.) and MNC status etc. The idea for this segmentation is to provide faster response time to clients, develop products that meet company’s loan funding needs and as a result help in better relationship with the client.
While getting an offer letter from bank, with department of corporate banking inked into your letter, your role will be to ensure delivery of loan products to companies. These roles can be (a) assistant relationship manager (b) credit analyst (c) risk analyst (d) support groups (focusing on documentation, checks and other compliances). Let’s delve into each of these roles. In the start of your career, being assistant relationship manager (ARM) will be shadow mapping a senior RM who will take you along to meetings with clients, make you run around for all the coordination with other internal departments of the bank to get the loan in place, make you work on proposal note and financial model (typically called CMA or Credit Modeling Arrangement). Some banks have allocated the work of RM that requires sitting on the laptop for preparation of proposal and financials to another department of credit analyst so that RM’s interaction with the clients can be enhanced. Risk analyst is tasked with evaluation of the proposal and financial model submitted by the RM/credit analyst also taking inputs from industry risk analyst on the sector and key developments. This also means that risk analyst gets to read a lot of research reports from CRISIL/CARE or other research agencies, keeping them updated for any development that might be critical to the proposal and the loan that bank is lending. If RM role is to get more clients in the bank so that its loan book can be increased, role of risk analyst is to evaluate these clients and proposals so that NPA level of bank can be minimized and the asset quality of bank remains healthy. The support groups help to disburse the loan by ensuring necessary compliances like KYC of the clients, creating account in system, and other documentation in place.
Let’s quickly understand what loan proposal entails, what is in financial model and what sort of assessment risk analyst carry out.
Loan proposal includes inter-alia details about background of client, industry assessment, and assessment of current and future projections of financials of client (CMA which includes balance sheet, profit and loss, cash flow) along with justification for changes in revenue, COGS, EBITDA margin etc. and key rations on the profitability side as well as debt servicing like DSCR (Debt Service Coverage Ratio), ICR (Interest coverage ratio) etc. along with working capital cycle assessment. Based on the assessment of current and future projections of the client, its funding needs in terms of fund based and non -fund based requirement is assessed. There are also compliances details in the proposal like getting net worth certificate from promoters, company shareholding details, due diligence for ensuring that none of promoter/director of company has been alleged for any fraud in the past, checks on various regulatory sites like CRILC (available only to banks wherein they have to report status of account with them as to regular or stressed and thus every bank knows the status of account with every other bank), MCA (ministry of corporate affairs). Other than that, there may be details of monitoring of account (in case of existing client) as to what were the account balances, transactions done by the client so that there are no fraudulent transactions done by the client. All this forms part of proposal of bank and that may be 50-100 pages. The key attachment to every proposal is the term sheet which is annexed along with the proposal and provides commercial terms like interest rates, type of loan, end use of loan, monitoring covenants, bank rights in case of default, along with security details that act as collateral to the loan.
This composite proposal is then shared with the risk team that assigns internal rating the proposal and in my experience with two major banks, they use the CRISIL RAM (Risk assessment model) that basically scores the proposal on key risk aspects (industry, promoter of company, financials, external rating). Getting a proposal cleared by the RM from the risk analyst takes time and can involve clarifications that RM might have to get from the company and might have to arrange a call with the company of its risk team.
Once, the proposal clears the risk analyst, it is put up to the sanctioning committee which comprises of senior people of bank (directors, MD, chief risk officer, RM head etc.). There are multiple committees and which committee the proposal will be put up to for appraisal depends on the quantum of loan being sanctioned and the rating of the proposal. The committees don’t happen daily and there is monthly schedule to it whereas the requirement of loan to client comes with a time bound request and hence it is RM’s job to get the proposal cleared in time and the loan disbursed.
Let’s understand a bit about what are the various funding products, these companies can avail from the banks depending upon their requirement. A lot of these loan products are common across all banks and can be bifurcated into fund based loans (where there is actual upfront outflow of cash to the company as a loan) and non-fund based loans (where it is more of a promissory nature and there is no upfront cash outflow to company. Only if the company defaults in payment to its suppliers, then bank has a liability to pay on behalf of the company so that supplier is protected while it is up to the bank to recover it from the company which is its client). The fund based loans are typically short term and long term where in short term are for less than an year (usually for meeting the working capital requirement of the company) and long term are greater than an year (can be for capex, refinancing etc). The non-fund based loans can be letter of credit which the client has to provide while buying material from supplier on credit basis, i.e. company buys material from its supplier who provides them with a credit period of say 1 month. So actual payment to supplier will happen after 1 month but what if company does not pay. To guarantee that, suppliers ask for letter of credit where in bank on behalf of company/client has the obligation to clear supplier’s dues in case the company fails to do so. Similarly other non-fund based products are bank guarantees or BG (advance BG, performance BG etc.). We are not delving into the technicalities of each product as of now.
This process where in RM sources a client, gets the proposal appraised from sanctioning committee and ensuring disbursement to the client is the sum and substance of corporate banking. The RM have business targets on the amount of loan they are required to disburse quarterly, half yearly and annually while there is no such target for risk analysts or the support group. This also indicates the stress level based on the profile you work in (RM also is incentivized as part of bonuses for meeting their targets).
As there are RM and the processes for normal companies, there are also similar RM departments that cater to companies that are in stress and recovery departments that focus on companies that have gone bankrupt.
For now, as a starter, I hope this article will be useful to you while evaluating what goes inside the corporate banking and which role might be suitable for you (in case you are lucky and have an option to chose:P).
We would love to hear from you in the comments section 🙂
By: Nishant Gupta (Email id: nishant@minervagc.com)
Disclaimer: The views and opinions expressed in the article are those of the author and do not necessarily reflect the official policy or position of any other agency, organization, employer or company. Since we are critically-thinking human beings, these views are always subject to change, revision, and re-thinking at any time. Please do not hold us to them in perpetuity.