The Art of Lending

A lot has been said in recent times about the growth of Private Credit as a worldwide phenomenon.

This growth stems from regulatory controls imposed on Banks in OECD countries following a series of agreements known as the Basel Accords that were entered into by each of the respective Central Banks in these nations.

Over the past few years, we have noticed an over-simplification of lending principles and therefore a corresponding reduction in lending standards, in order to make investing in Private Lending more appealing to investors.

Many people will say that Lending is simply a product of:

Loan to Value Ratio – which measures the loan as a percentage of the value of the collateral security. For example, a Loan to Value Ratio ‘LVR’ of 65% implies that there is borrower equity of 35% and in essence the value of the collateral can diminish by up to 35% and the lander can still recover 100% of its principal advance.
Serviceability – the ability of a Borrower to pay the interest ‘Service’ the loan. Each lender sets a minimum Interest Cover Ratio depending on the product.
Credit Worthiness – typically through credit reference checks regarding a given borrower’s track record of meeting their obligations as they fall due.

These are considered by many as the ‘ABC’ of basic lending principles.

In general terms there are two distinctly different types of lending categories:

Standardised Lending Products such as home loans, asset finance, invoice discounting, personal loans, and car finance. Most people are generally familiar with these types of products.
Structured / Commercial Lending Products – these are typical more structured loans with varying terms depending on the circumstances of the underlying commercial Borrower.

The comments made under points A, B & C above are fundamental for all lending. In reality, the Art of Commercial Lending involves a lot more than these three basic rules.

Lending at its core is founded on the premise that the Borrower has to repay the loan within the term of the loan. As such, good lenders understand the ‘Five Lines of Defence’ required to minimise or eliminate losses.

The first line of defence is at the Origination Phase namely choosing who you deal with, their track record, experience, and character.
The second line of defence is at the Assessment Phase – assessing the underlying security, its potential to increase or decrease over time, the supply and demand fundamentals of similar types of collateral in the area supported by a deep understanding of valuation principles.
The third line of defence is the Approval Phase. Is Lender’s Approving authority purely independent from the sales function or better yet does the Lender have an Independent Credit Committee.
The fourth line of defence involves Active Management and Regular Monitoring. Good lenders will regularly review their loans and actively engage with their Borrowers to ensure that any early warning signs of diminishing credit risks are identified and adequately dealt with
The fifth line of defence is having a robust recovery process in place and a thorough understanding of the Lender’s legal rights and obligations.

The next time you hear the words ‘the best risk adjusted returns’ please ask the question about the five lines of defence listed above as they form the basis of ‘best in class’ lending practices and better reflect the ‘risk adjusted’ component of this commonly used phrase.

Princeton Financial Services has an enviable track record of 100% capital return and zero losses since its inception in 2012. Princeton is the only Lender in the marketplace with an Independent Credit Committee. The Five Lines of defence are ingrained into Princeton’s DNA in addition to the ABCs of lending.

#PrincetonFinancialServices #Princeton #DebtFund #Investing #CRED

George Gadallah
Chief Executive

This opinion piece is written by George Gadallah, Chief Executive and Co-Founder of Princeton Financial Services. With a Bachelor’s Degree in Economics, a Masters in Finance, and over 28 years of experience in Banking & Finance, George brings deep industry insight to his analysis.

In 2012, George co-founded Princeton Financial Services and the Princeton Fund Series alongside Craig Anderson. As Princeton’s Responsible Manager under its Australian Financial Services Licence, he oversees the strategic management and direction of the Princeton Group.

Before founding the Princeton Group, George held senior management roles at ANZ and St. George Bank (SGB) from 1995 to 2011. Between 2008 and 2011, he served as Executive Manager and Head of Property Finance CBD at SGB, where he led a team focused on prudent risk and credit management, achieving strong performance under his leadership. George’s extensive experience and commitment to risk management continue to guide Princeton’s responsible growth in the financial sector.

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