Question

issue in financial accounting

You have been recently appointed as a lending officer in a large bank. The bank is concerned about lending in the current economic environment, where there has been an economic downturn. Prepare a report outlining what agency problems the bank should be concerned with and how debt covenants in debt agreements can be used to reduce those problems. Also explain how accounting numbers can be used to assist in the process?

Using the reference materials available on the internet and text book, research the topic and prepare a report for the bank fully referenced up to 500 words.

Answer 1

Answer:

Reporting on risks of lending recession:

"The lending under the recession or economic downturn period is rather very difficult and risky because in this period people loses yheir jobs and businessman gets into losses in their businesses. So, the debt agreements should include following three points.

• Person must keep on paying their monthly dues as soon as he/she get his/her salary.
• Any job change or loss of job must be intimated to the bank, so that bank takes appropriate actions to stop lending.
• Any closure of the business must be intimated to the bank, so that bank can take apt actions.

The risks of lending includes the agency problems where the lending party has been termed has sound by the agent and though its document but actually the lended party proved to be jobless and having no business. In such cases, it become impossible to have the recovery of the lend amount.

The past accounting records would provide us with the information's regarding the localities and areas where there have been less no-receipt of the dues. The peoples which are less proven for the defaulters in the payment of the bank dues. So bank can have lending actions in such areas which are safe the point of lending".