Lending

Lending

As the second largest commercial bank in Estonia and the country’s leading retail bank, the distinctive feature of the Bank’s loan portfolio is a high share of loans to private individuals. According to the statistics published by the Bank of Estonia, the Bank held a 46 per cent market share in loans to private individuals as of 30th June, 1997. Standardised loan products for individuals are comprised of student loans, consumer loans and housing loans.

The Bank also holds a 16 per cent market share in corporate lending and 69 per cent market share in loans to Estonian municipalities according to the statistics published by the Bank of Estonia as of 30th June, 1997. In corporate lending, the Bank offers equipment and working capital loans, along with overdraft facilities, guarantees, letters of credit and receivables financing.

The table below shows the breakdown of the Bank’s loan portfolio by economic sector:

EEK 000	December 31, 1996	December 31, 1995
Industry	7%	10%
Trade	11%	16%
Energy	5%	7%
Servicing	6%	6%
Food processing	4%	6%
Hotels and tourism	3%	4%
Municipal	5%	6%
Financial institutions	8%	7%
Private persons	29%	18%
Student loans	6%	10%
Real estate	8%	0%
Other	8%	10%
Total	100%	100%

The following table sets forth the maturity profile of the Bank’s loans by original maturity as of 31st December, 1995, 31st December, 1996 and 30th June, 1997:

	31 December, 1996		31 December, 1995
	Amount	%	Amount	%
Loans overdue for 30 days	2,016	0.09	940	0.10
Loans overdue for 30-90 days	15,462	0.67	5,632	0.59
Loans overdue for 90-150 days	18,038	0.79	6,499	0.68
Up to 1 month	52,107	2.27	23,879	2.49
From 1 to 3 months	162,940	7.10	56,976	5.93
From 3 months to 1 year	559,888	24.39	221,438	23.06
Loans between one and two years	479,416	20.89	311,008	32.38
Loans between two and five years	666,605	29.04	231,677	24.12
Loans five years or greater	338,848	14.76	102,394	10.66
Total loans	2,295,320	.00	960,440	0

Credit Procedures

The Bank has established a matrix system of division of powers with respect to assessing and approving credit applications, designed to ensure that credits are granted only after adequate review while allowing for maximum flexibility. The credit approval procedure is governed by two principals - the regional loan committees and credit approval levels. The Bank currently has 18 loan committees and the Bank’s Credit Committee. Four credit approval limits are classified by the loan amount:

Level 1 - Loans from EEK 10.0 million up to 25 per cent of the Bank’s capital can only be granted by approval of the Bank’s Credit Committee.
Level 2.1 – Corporate loans in the amount of up to 10 million can be granted by the credit committee of Corporate Banking Division.
Level 2.2 – Private loans in the amount of up to 1.5 million can be granted by the credit committee of Private banking Division.
Level 3 - Loans in the amount of up to EEK 5.0 million can be granted by Regional Credit Committees.
Level 4 - Loans in the amount of up to EEK 1,500,000 can be granted by Local Credit Committees.
Level 5 - Loans in the amount of up to EEK 50,000 can be granted by respective Credit Officer.

In addition, certain other credit approval limits relate to the type of lending, interest rate and maturity of the loan.

The Bank has adopted detailed credit approval procedures which require standardised credit applications to be submitted to branch offices. The credit application has to contain information regarding the applicant (financial statements, statutes, copies of registration documents and licence(s) if applicable, business plan etc.) as well as the property provided as collateral, and a detailed description of the project for which the loan is needed. In general, the Bank requires collateral with a value of at least 150 per cent of the applied for loan amount. Under Estonian banking regulation, banks are not allowed to grant unsecured loans.

The credit approval process requires, amongst other things: a review of a borrower’s financial position, including an analysis of a borrower’s financial position and any previous credit history with the Bank as well as with other credit institutions in Estonia; a review of the total credit currently extended to that borrower or borrower group (if part of a wider group structure); financial projections for the borrower’s business or intended project; a review of the competitive environment of the customer’s business; and a market valuation of all collateral when applicable, including, in the case of real estate, an appraisal by one of the independent valuers approved by the Bank.

In addition to lending out its own funds, the Bank is an intermediary for a special purpose government fund, the Fund for Agriculture and Rural Development. In granting loans from this fund, in addition to its own credit criteria, the Bank’s also considers specific requirements set out by the funds. The Bank also issues student loans, the final credit risk is carried by the Government which is liable for unrecoverable loan losses.

In 1995, the EBRD assigned a credit line in the amount of DEM 13.0 million to the Bank, specially designed for funding privately held companies for up to seven years. As of 30th June, 1996, the Bank had fully utilised the amount of credit granted and further lending connected to the project will take place on a revolving basis, out of the amounts to be repaid from existing loans. The loans granted within this particular program are, in addition to the Bank’s own analysis, subject to review and approval by the EBRD. In addition, in 1996 the EBRD assigned a credit line in the amount of DEM 3 million to the Bank, specially designed for private lending.

Credit Quality and Provisioning Policy

The Bank employs a strict provisioning policy which is in accordance with International Accounting Standards. The total loan portfolio is decreased by the total amount of the provisions.

In assessing the loan quality and provisioning rate to be applied, three different factors are considered:

Loan servicing history
The borrower’s financial status
The collateral

The loans are assigned a rating amongst five categories according to the servicing of the loan:

Category	Loan Category Description	Provisioning rate
Standard	All necessary repayments (both interest and principal) have been made as specified in agreement. Either there is no overdue interest or principal, or it is not significant (nothing more than five days and not more often than six times during the year). Furthermore, no capitalisation or rescheduling of interest or principal has occurred.	2%
Watch	There have been minor disturbances in repayments of interest or principal, interest has been capitalised or rescheduling of interest and principal has taken place. Delays in repayments have been 5-30 days and have not occurred more than three times during a year.	5%
Sub-standard	There have been disturbances in repayments of interest or principal, interest has been capitalised or rescheduling of interest and principal has taken place as per the difficulties of the customer. Delays in repayments have been 30-60 days and have not occurred more than three times during a year.	20%
Doubtful	There have been disturbances in repayments of interest or principal, interest has been capitalised or rescheduling of interest and principal has taken place as per the difficulties of the customer. Delays in repayments have been 60-90 days and have not occurred more than once during a year.	50%
Loss	There have been major disturbances in repayments of interest or principal, interest has been capitalised or rescheduling of interest and principal has taken place. Delays in repayments are more than 90 days.	100%

On the basis of the information obtained during the review of the credit application, a rating is assigned to each exposure. These ratings are adjusted on a regular basis, in particular when there are any signs of a possible lowering of the customer’s ability to service its debt or general worsening of the customer’s financial status. The borrower’s financial status is assigned a rating amongst five categories, with category A clients representing the financially strongest clients:

Category	Explanation
A	The borrower is of high quality, there is a clear indication of the borrower’s ability to make necessary interest and principal payments and that is also likely to continue in the future.
B	The borrower is financially stable: however, certain unsatisfactory aspects of financial performance are perceived.
C	Certain unsatisfactory aspects to the financial performance are evident that may affect the borrower’s ability to repay the loan.
D	There are a significant number of unsatisfactory aspects evident that are likely to have an impact on borrower’s debt servicing ability.
E	Financial performance clearly indicates that the servicing of interest and principal is unlikely.

According to the above two category ratings, the loans are classified and provisioned by following matrix:

	Standard + Watch	Sub-standard	Doubtful + Loss
A	Standard 2%	Watch 5%	Sub-standard 20%
B	Watch 5%	Sub-standard 20%	Sub-standard 20%
C	Sub-standard 20%	Doubtful 50%	Doubtful 100%
D	Doubtful 50%	Doubtful 100%	Loss 100%
E	Loss 100%	Loss 100%	Loss 100%

In assessing the possible loan losses for the three lowest categories (i.e. Sub-standard, Doubtful and Loss), the collateral value is deducted from the remaining principal of the respective loan according to the following principles:

Type of collateral	Amount to be deducted from remaining principal
Mortgage	75 per cent of the market value according to the appraisal of an independent real estate company, assuming that the property is insured.
Commercial pledge	Equipment - 50 per cent of the book value of respective assets Inventory - 75 per cent of the book value of respective assets
Government Guarantee	Amount of the guarantee
Shares quoted on TALSE	50 per cent of the market value of the shares
Bank guarantee	Amount of the guarantee

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