The four major banks regularly monitored by the Riksbank have similar procedures with regard to granting corporate loans. The bank assesses the risk in a particular loan on the basis of two aspects: the customer’s ability to repay and the collateral that can be offered. The customer’s ability to repay is the more important of these two aspects. For obvious reasons, loans without collateral are assessed more stringently. The fact that the banks now focus more on the ability to repay than on the value of the collateral is a lesson learned from the bank crisis in the 1990s. Before a loan is granted, it is necessary to assess the risk of default in the form of a suspension of payments or bankruptcy. This means that the banks consider stable cash flows to be more interesting than whether a project can provide a higher yield than expected. On the basis of the bank’s assessment, the borrower is assigned a risk classification. This classification contains both quantitative and qualitative factors and the risk grade is reviewed annually. The quantitative analysis is based on the company’s profit and loss statements and balance sheets, while the qualitative analysis is based, for instance, on the company’s competitiveness and the quality of its management. When making the decision to grant a loan, the assessment of the customer’s ability to repay is supplemented with information on the specific loan, for instance, the amount of the loan and the collateral the borrower can offer against the loan.
Importance of sound advice Access to sound financial advice has become even more important today as households face the challenges of managing heavier debt loads, higher costs of healthcare and education, effects of natural calamities that are occurring with greater frequency, and longer life spans. We believe that the responsibility to provide sound advice falls on all insurance intermediaries, whether you are an agent, an insurance broker, a bancassurer, or a financial adviser. This is clear in our Guidelines on Proper Advice which states among other things, that if an intermediary cannot match the needs and requirements of a customer with a life or takaful product within the intermediary’s offerings, the intermediary should not recommend any product to the consumer. However, we are also mindful that sound advice can have different shades which depend on many factors, including the competence of those providing the advice, the solutions that they are permitted or equipped to advise on, and incentive effects which may, either in perception or reality, colour that advice. Financial advisers provide an alternative channel through which consumers can obtain insurance advice, taking into account individual perspectives on these factors. The fundamental principle remains the same – that whichever the channel, and acknowledging the advantages and limitations of different channels, consumers should receive advice that is in their best interests.