Credit Officer
Why this chapter
To work out what exactly a bank charges a business for, and why it likes some deals and not others.
An analogy
Picture yourself running a warehouse that sells not goods but promises. The owner of a workshop comes to you: they need money today, and the revenue will arrive in three months. You can lend to them, you can buy from them the right to collect from their buyers, or you can buy a machine and lease it back to them. All three deals look different on the outside and are the same on the inside: you give money now in exchange for someone else's promise to pay later. The second chapter is about how those promises differ, what they turn into on a bank's balance sheet, and what happens when a promise is not kept.
How it works
A bank creates money with more than loans. Buying any asset from a customer (bonds, a building) is paid for by crediting their account — the same new money. Selling an asset to a customer destroys a deposit.
Loan loss provisions (a charge taken against expected losses) are not “money put aside” but an accounting way of admitting the pain early: profit ↓, provision ↑. A default is written off through the provision, without touching profit at the moment of the write-off.
Factoring is buying receivables at a discount. Leasing — the bank buys the machine and “rents” it out. Overdraft — a loan created at the moment of a payment above the balance. One engine everywhere: asset↑ deposit↑.
The words of this chapter
An overdraft
An agreed minus on a current account. The money appears not at the moment the agreement is signed but in the second the customer pays more than they have.
It was invented to fit the real rhythm of business: you have to pay today, and money arrives unevenly. Keeping a separate loan for that is expensive and slow.
Factoring
The sale of receivables: the bank buys from a supplier the right to collect from that supplier's buyer and pays at once, keeping a discount for itself.
It was invented for those who ship on deferred payment. It turns tomorrow's revenue into today's money without requiring collateral.
Leasing
A loan with the collateral sewn inside it: the bank buys the machine and hands it over for use, remaining the legal owner until the last payment.
It was invented to make recovery simpler. The lender does not have to sue for the collateral — the item is already its own.
A loan loss provision
An expected loss on loans, recognized in advance. It is not money put away in a safe but a reduction of your own profit by the amount the bank does not expect to collect.
It was invented so that bad news appears in the accounts when it became likely, not when it became a fact.
A default
A borrower's refusal to pay. On the bank's balance sheet it looks like this: the claim on the borrower is erased, and what pays for it is the provision already made and, in the end, the owners' share.
The word itself is needed to separate a nuisance from a catastrophe: one borrower's default is a working situation, many defaults at once are the end of the institution.
Evergreening
The trick where a bank gives a borrower a new loan so that the borrower can pay the interest on the old one. Formally income has been received; in fact no money arrived.
It was invented not out of usefulness but out of fear of admitting a loss. The accounts improve with a single entry, and the hole grows.
What happens to the balance sheet
Every deal in the chapter is built the same way: a new claim appears on the bank's left, and a new balance in a customer's account on the right. The only difference is what stands behind the claim: a borrower's promise, their buyer's debt, or a machine. The loan loss provision stands apart: it does not move money at all. It lowers the value of what the bank expects to collect, and it lowers the owners' retained profit by the same amount. No customer notices this, because not one balance changes.
Where the money comes from here
The bank earns on three things: on interest, on the discount when it buys other people's debts, and on the difference between the cost of money and the cost of risk. A lending department is expensive to run: every corporate som takes twice as much of the owners' cushion as a mortgage som, because it is considered riskier. The one who loses is whoever's borrower did not pay: the loss is not smeared across depositors, it is taken in full by the owners' share, through provisions. Here is why this matters to you: when the bank bargains with you over the rate, it is not bargaining over greed but over how much of its own capital it will have to tie up behind your deal and how far it believes in your cash flow. Bring proof of the flow — and the conversation about price becomes a different one.
What people usually get wrong
The common belief. A loan loss provision is money the bank sets aside for a rainy day.
What is actually true. A provision does not move one som. It is an admission that part of what was lent will not come back: the value of the loans falls, and the owners' profit falls by exactly as much.
The common belief. When a borrower does not pay, the bank's depositors are the ones who lose money.
What is actually true. On a write-off no customer's balance is touched. The money created by that loan went out into the economy long ago and stays there. The loss is taken by the owners' share.
The common belief. If a bank shows a profit, then everything must be fine with it.
What is actually true. A profit can be drawn with a single entry: give a non-paying borrower a new loan so they can pay the interest on the old one. No money arrived, and yet there is income in the report.
After this chapter you will be able to
- read one deal from two balance sheets at once and find, for every som, its mirror debt
- weigh up a purchase of receivables: where the new money is here, where the income is, and who is left with the risk of non-payment
- put together the recognition of expected losses in advance, and see whose profit pays for them
- protect the accounts from income that no money arrived for, and recognize evergreening by the pattern of the entry
- tell a repayment from a default by whether money is destroyed, and find whose capital closed the hole
Check yourself
The bank bought a bond from a company and credited the money to its account. Is there more money in the economy?
Yes.
The entries are the same as when making a loan: the bank's property grew and the customer's balance grew. Money is created not by the word “loan” but by any purchase by a bank of an asset — that is, of any property: a bond, a building, foreign currency — from someone who is not a bank.
The borrower went bankrupt and the bank wrote the debt off. Where did the money the bank once created with that loan go?
They stayed in the economy.
The money that was created spread across other people's accounts long ago and went nowhere. Only the bank's claim was erased. The difference was paid by the owners' share, through the provision made earlier.
How does a lease differ from an ordinary loan against collateral?
By who owns the item.
In a lease the machine legally belongs to the bank until the last payment, so recovery is simpler. But the credit risk does not disappear — it turns into the question of what the machine can be resold for.
In short
A bank gives a business money today in exchange for a promise to pay later. The promise can be documented in different ways — as a debt, as a sale of someone else's receivable, or as a machine on lease — but the substance is one. If the bank sees in advance that part of the money will not come back, it reduces its own profit by that amount without moving anything anywhere. When a borrower does not pay, it is the bank's owners who lose, not its depositors. A profit in the accounts proves nothing on its own: what matters is whether real money arrived behind it.
Reading is half the job. In the academy this chapter is worked through by posting entries: you run the operations yourself and see whether the balance sheet still balances.