Loans and financial matters

There can be few natural sights as impressive as that of the African wildebeest on its annual migration. Herds stretch across the Serengeti as far as the eye can see. They reach rivers that must be crossed where crocodiles wait in ambush. Individual wildebeest are taken but instinct is so strong that the rest press on regardless. In the swinging 1960s a British group (The Kinks) had a popular hit with their song “For he’s a dedicated follower of fashion”. Primates live in groups, lions in prides and whales and dolphins in pods. People lived in villages, then towns and increasingly in mega-cities with their ethnic ghettos and residential districts. There is an ancient Chinese saying that can be translated as “The nail that sticks out will be hammered in.”
Bankers are often criticized for acting as a herd. If one bank determines that this is a good time to be expanding its mortgage/consumer finance/SME/corporate loan book then you can be reasonably confident that most other bankers have reached the same conclusion. In the 1980s most large international banks bought US$ bonds issued by South American governments. They were all confident that “countries can’t fail” and few of these banks were spared from the huge losses that resulted when they did.
Unfortunately, when an economy moves into recession and companies are most in need of financial support all banks seek to restrict new loans and reduce their exposure to those segments perceived to be of highest risk. This can end up being a self-fulfilling prophecy as cutting off the life-blood of working capital at these companies can result in liquidation of viable companies simply because they lack the cash in the short term to pay their employees, utility bills and for raw materials.
These criticisms of bank herd behavior are both valid and unreasonable. It is irrational to expect people to act rationally and bankers are people. It takes a great deal of strength to swim against the tide and some that try drown. In any case being a part of a herd can make sense. The wildebeest most likely to be taken by the crocodiles are those that cross first and the stragglers. The safest time for an individual to cross is at the peak of the migration when the sheer weight of numbers affords most protection. It is not so very different in banking.
Banks normally classify companies as corporate customers based on sales or asset size criteria. The minimum size criteria vary from country to country and from bank to bank but a company with sales of less than $100m would be unlikely to be given corporate status at most banks in developed markets. Corporate bankers are usually organized along industry lines such as telecommunications, technology, real estate, oil and energy, transport, utilities etc.
This specialization is necessary because bankers need to understand the dynamics of the industries in which their customers are operating to assess the underlying credit risk and likelihood that the company will be able to meet its financial obligations.
The credit appraisal process for loans to corporates is normally done on a case-by-case basis. Large loans have to be approved at executive or even board level. Lending to corporates in most countries has been in relative decline, however, with the decline greatest in more developed markets. The three most important factors behind this shift are arguably the following: