VOLUME FIVE
THE MANAGEMENT OF CREDIT

. no sensitivity analysis undertaken of advertising revenues; and

. failure to assess means by which loan principal would be repaid.

. equity commitment pre-condition waived after funds drawn down; and

. Lending Credit Committee pre-conditions either not satisfied or outcomes not communicated to LCC.

. history sheet not maintained in relation to facility; and

. downward trends in borrower's profit forecasts not critically reviewed from submission to submission.

. notwithstanding customer down grading to category 5c, security not revalued until September 1990 and loan-to-value ratios calculated by reference to June 1989 figures until August 1990;

. security evaluations not notified to Board for six weeks after revaluations completed and potential conflict of interest on the part of the valuer not queried by LCC or Board; and

. further loan of $3.0M made in January 1991 not approved by the Board.

. no assessment of borrower's cashflows and budgets, which were inconsistent in some respects;

. Celtainer's business was heavily dependent upon a single customer; and

. inappropriate facility structure resulted in overdrawing of limits.

. analysis of financial statements of Celtainer for year ended 30 June 1987 was flawed. Celtainer did not satisfy loan covenant when money advanced, implying that it should not have been lent.

. no evidence of monthly monitoring of negative pledge covenants;

. Celtainer was not notified of overdraft excesses, nor were penalty provisions invoked;

. exposure monitoring was hampered by late delivery of financial information by Celtainer; and

. when original facility formally amended in 1990 existing multi-currency line of $1.2M which should have been deleted was overlooked.

. no formal corrective action plan, as required by Bank policy, was established.

. no examination of cashflow projections by the Bank - reliance was placed on Ayers Finniss Information Memorandum, which did not contain a rigorous analysis of Collinsville's cashflow projections;

. detailed cashflows and balance sheets were not presented to the LCC, nor were material asset revaluations explained;

. no ratio analysis of the Group was performed;

. security information was not included on form of application;

. valuations of asset securities included two parcels of land which were not in fact obtained as security.

. utilisation of funds was not in accordance with the approved submission.

. crucial information was withheld in reporting to the Board in June 1990;

. livestock insurance not effected, resulting in an uninsured exposure of up to $20.25M; and

. no top-up security was sought when facility security became inadequate in January 1990.

. a provision for loss should have been made at June 1990.

. no external credit assessment performed on companies in the Group.

. relevant information about a key B Ltd executive was not brought out in initial submission to LCC; and

. net lending Margin of Security was calculated at $2.4M - below proposed loan of $5.0M.

- ASPENAIR PTY LTD

. no evidence of independent verification of Societe Generale Information Memorandum; and

. listing of directors of the borrower not included in syndicate submission.

. advances to Hooker Fidelity Trust in June 1988 and to Aspenair Pty Ltd in February 1989 should have been confirmed by the Board due to the overall level of group exposure.

. security documents not forwarded to the Bank until four months after initial facility drawdown.

. no review undertaken of the basis upon which car park lease valuations had been prepared.

. review of car park lease valuations in 1989 and 1990 would have indicated a decline in the value of loan security; and

. registered first mortgage between borrowers and "X" Pty Ltd was not adequately evaluated.

. contrary to Bank policy, a registered mortgage debenture was taken as primary security without an audit of asset values shown in the company's balance sheet;

. in a direct departure from Bank processes, no industry analysis was performed on the facility;

. no assessment of company management and its operations was made;

. the degree of analysis applied to financial information was less than required by Bank process; and

. diversion of funds by the borrower in contravention of loan covenants was not notified on a timely basis to senior management.

. irregularity in the facility was not reported to the LCC for ten months from its first occurrence;

. the LCC was not informed of or asked to approve the appointments of a Receiver and Manager in May 1990; and

. the facility should have been classified as non-accrual in June 1990; it was not so regarded until August 1990.

. integrity of financial information in the application not checked by reference to signed audited accounts;

. ratio analysis was limited;

. establishment record not prepared;

. no external credit assessment was prepared on group companies or directors; and

. Specification of Securities form is incomplete and there is no evidence that insurance cover was checked.

. no indication as to why the Bank had been requested to offer the facilities in lieu of the Company's usual banker, Westpac.

. no evidence of stamping of security documents in Specification of Securities form; and

. upstamping was not timely and the borrower in any event regularly exceeded its credit limits.

. no file copy of approval letter, either for initial advance or the assumption of Westpac facilities; and

. no evidence of involvement at settlement by Securities Section.

. the borrower regularly exceeded authorised facility limits through February 1989, suggesting that the loan could have been classified as non-performing earlier than it was;

. 1988 Credit Review should have been actioned earlier and referred to LCC for ratification;

. no review of insurance policies undertaken until June 1990; and

. loan files were incomplete and poorly maintained.

. classification as a non-accrual loan did not occur in accordance with policy;

. no detailed action plan on file in July 1991;

. no submission exists on file dealing with the loan or its likely outcome; and

. although around $4.8M remains outstanding, financial statements are not expected from the borrower for 1991.

. no assessment of F Ltd's financial position or ability to repay loan principal; and

. no independent valuation of a yacht offered as loan security.

. financial position of loan guarantors was not fully established; and

. no review of cashflows was prepared.

. receivable did not eliminate inter-company balances;

. advance to security ratio was wrongly understated;

. finance lease liabilities were not considered until brought on balance sheet by introduction of new accounting standards;

. non-standard lending margins were applied to trade receivable;

. lending margin was lower than the approved facility; and

. mortgage debenture was improperly

. Manager, Commercial Advances approved a facility increase outside his approval limits.

. facility was not reviewed when classified as non-performing; and

. no action taken to review file until after Retail Credit Inspection in April 1991.

. financial information provided by the borrowers not properly considered or independently verified;

. no ratio analysis undertaken;

. establishment record not properly completed;

. no external credit assessment performed on the prospective borrowers;

. specification of securities forms deficient, especially in detailing insurance cover; and

. no consideration of the effect of a downturn in the property market or of poor tenancy mix at borrower's shopping centre.

. no consideration as to why financing being transferred from another bank.

. specification of Securities forms do not evidence timely stamping;

. overdraft facility for $20,000 granted in November 1987 was unsecured; and

. exceeding of facility limits did leave the Bank vulnerable to being under-secured.

. no evidence of a check that rates and taxes had ben paid to the settlement date; and

. some documents which should have been reviewed by Securities section not held on file.

. loan should have been classified as non-performing at an earlier stage; and

. files do not show when loan was to be regarded as non-performing.

. procedures applicable to the management of irregular accounts were not invoked on a timely basis;

. regional office was not provided with regular Arrears reports;

. the loan was classified as non-accrual later than Bank procedures required;

. no detailed action plan noted on file at 18 June 1991;

. situation has been allowed to deteriorate while new equity is sought;

. no file record of likely outcome of a falling property market.

. facility draw downs were not accompanied by regular upstamping; and

. there is a lack of correspondence between security taken and what was approved by the Board.

. no History Sheet has been maintained for the account.

. no evidence that provision of $5.0M against this account has been ratified by the Board.

. no independent valuations of security offered;

. limited value in cashflow and financial projections prepared; and

. no long term forecasts were prepared to support the ability of the borrower to repay the loan.

* Procedure manuals had not been issued - comments are related to perceived weaknesses supported by review of manuals issued subsequently.

. permitted lending margin exceeded in December 1988 when facilities were extended;

. security for overdraft and interest accounts is under-stamped; and

. specification of Securities forms were not completed.

. insurance confirmations not held for all periods in which advances were made; and

. there is no evidence that some conditions precedent to advancement were satisfied.

. interest capitalisation was back dated to 1 October 1990, but doubt as to authority to do this;

. feasibility of revised cashflows provided in support of overdraft facility increases was not ascertained; and

. excessive reliance was placed upon the personal worth of the guarantors.

. no evidence located concerning the size of the provision approved by LCC;

. no arrears reports advised to Regional Office even though a loss was expected;

. no formal valuation of loan securities made since December 1987; and

. No action taken to enforce the security or guarantees.

. specification of Securities forms were not properly completed.

. non-disclosure of the role of Kabani Pty Ltd to the LCC;

. ability of the borrower to repay not analysed in the context of a stoppage or deferral of redevelopment;

. limited financial analysis of the group;

. borrower advised of valuation required to support the loan prior to valuation being prepared; and

. the Bank's exposure only to the customer was noted in the submission; the exposure of Beneficial Finance was ignored.

. specification of Securities forms cannot be located and details of stamping of documents are piecemeal.

. from February 1989 to May 1989 the term of the facility was extended, apparently without approval. This was repeated in November/December 1989 and July/September 1990;

. LCC approved a facility increase in 1989 without Board ratification, as the Bank's procedures required; and

. as a problem loan, the October 1990 request for extension should have been referred to the Board for approval but was not.

. files do not evidence any consideration of the Bank's role in advising loan default.

. financial information received from the customer was not independently verified or critically analysed to determine ability to repay either from the project or other income sources of borrowers;

. tenancy problems inherent the project were not considered with by the Bank or sufficiently by its valuer;

. no effort made to find out why National Australia Bank, which financed land purchase, was not involved in financing the development;

. economic and industry specific considerations were not taken into account; and

. no evidence that mortgage documents stamped to a particular value.

. funds were advanced in accordance with work completed, but reports to the Bank did not advise of construction difficulties or likely overruns until December 1989.

. no critical assessment of budgeted against actual costs;

. dispute between architect and developers was not monitored or its possible impact assessed; and

. additional financing was approved in March 1990 even though project was then financed at close to market value and the Bank know of borrowers; weakening cash position;

. effects of a falling property market were not fully appreciated;

. limited use of ratio analysis to assess project viability; and

. specification of Securities form not wholly completed.

. no High Risk Credit Reports nor a Credit Paper recommending risk down grading were prepared;

. no action plan had been prepared to 5 July 1991; and

. the provision raised is inadequate.