1. Bank Lending: Policies & Procedures
Chapter : 16
Bank Lending: Policies & Procedures
M. Morshed

2. Objectives of Lending Policies
Resource planning to match lending outlay.
Strategy to win over the nearest competitors.
Augment good lending base with moderate risk involvement.
Increased profitability.
Ensure balanced loan portfolio.
Quick disposal of loan cases.
Development of efficient & capable loan personnel.
Building up market reputation & goodwill by satisfactory services to the loan customers &
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3. Steps Required in Framing a Lending Policy
Demarcate market area, market share & define profit goals.
Determine the types of loans that will best serve the bank in realizing set market area, market share & profit goals.
Arrange due legal sanctions from the appropriate authorities, i.e. central bank or others.
Arrange proper & effective communication of the lending policy decision to loan officers & others & others likely to be interested, i.e. existing & potential loan customers.
Arrange regular periodic review, updating & improvement of the policy to suit the demand of time & situations.
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4. Contents of a Bank Lending Policy
Lending Budget
Total amount for a particular period.
Maximum amount for a single case
Average amount of lending to be made per case.
Composition
Types of loan
By areas
By economic sectors & sub-sectors & industry mix
Investment loan
Productivity loan
Periodicity
Call loans
Short-term working capital loan
Intermediate-term investment loan
Long-term investment loan.
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5. Contents of a Bank Lending Policy----Contd
Documentation Standard
Application
Evidences of Security
Loan agreement.
Credit reports
Acceptable Securities
Criteria of acceptable security
Listing of acceptable security
Allowable margins to be made
Qualifications of becoming guarantors
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6. Contents of a Bank Lending Policy----Contd
Evaluating Credit Worthiness
Acceptable records, data, & other useful information
Personal interview
Credit investigation
Accepts to be covered – personal, financial, market, management etc.
Pricing: Lending Cost + Profit
Lending Cost = Cost of fund + Cost of lending operation + Liquidity of the advance + Risk.
Rate of Interest or Profit
Scale of Interest Rates/Profit.
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7. Contents of a Bank Lending Policy----Contd
Customer Category
Rate of Interest/Profit
Excellent
Base Rate/Prime Rate (PR)
Satisfactory
PR +0.5 %
Average
PR + 1%
Below Average
PR + 1.5%
Unsatisfactory
PR + 2%
Table: Bank’s Interest Rate Charges to Customer
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8. Contents of a Bank Lending Policy----Contd
Lending Authority
Sanctioning limits of various types of loans
Branch Manager
Regional Manager
Deputy general Manager
General Manager
Managing Director
Board of Director
Authorization of the Central Bank where required.
Compensating Balance
Right of offsetting deposit balance for an outstanding loan
Method of computation of compensating balance.
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9. Contents of a Bank Lending Policy----Contd
Risk Average
Types of risk involved
Insurable risk
Supervision & Control
Who supervises? When & how?
Loan installments’ release process.
Reports & Actions
Collection Procedure
Repayment schedule
Remainders & circular letters
Personal visits
Collection through cheques
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10. Contents of a Bank Lending Policy----Contd
Loan Accounting & Record
Recording procedure to be followed.
Loan/project profiles to be maintained
Statements to be provided
Competition
Possible competitors
Their strengths & weakness.
Methods of winning competition
Avoiding unhealthy competition.
Loan Grading System
A= Top grade loan, B= Good loan, C= Marginal Loan, D= Doubtful loan, E= Likely to be bad loans.
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11. Contents of a Bank Lending Policy----Contd
Procedures of handling problem loans
Criteria if identifying problem loans.
Methods to be used for identification
Steps to be taken
Setting up loan reserves.
Development of Efficient Loan Personnel
Loan-man ratio to be ideal.
Training on the various aspects of loan processing.
Credit evaluation, follow up, retirement, etc.
In bank, on the job, on-hand, & foreign training are necessary.
Policy Review & Improvement in new policy
Methods of policy review.
Periodicity of policy review
Personnel responsible for policy review.
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12. How to Measure the Credit Worthiness of Borrower?
CAMPARI
C = Character of the borrowers.
A = Amount of loan sought (justification)
M = Means of Financing
P = Purpose for which the asked for loan to be utilized.
A = Accountability of the borrowers to be ensured.
R = Risk Extent
I = Insurance to cover risk of default.
PARSAR
P = Purpose, A = Amount
R = Reason, S = Sources of Payment
A = Ability, R = Risk
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13. How to Measure the Credit Worthiness of Borrower?---Contd
Seven Cs
C = Character
C = Capacity
C = Cash
C = Collateral
C = Conditions
C = Capital
C = Control
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14. Satisfactory Performance Unsatisfactory Performance
Regulation of Lending
“Uniform Financial Institutions Rating System” has introduced the following rating system for the banks: 1=
Strong Performance 2=
Satisfactory Performance 3=
Fair Performance 4=
Marginal Performance 5=
Unsatisfactory Performance
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15. Regulation of Lending-----Contd
All five dimensions of bank performance are combined into one overall numerical rating, known as “CAMELS” rating.
C = Capital Adequacy
A = Asset Quality
M = Management Quality
E = Earnings
L = Liquidity
S = Sensitivity to Market Risk
Banks whose overall CAMELS rating is toward low, riskier end of the numerical scale – an overall rating of 4 or 5 – are examined more frequently than the highest-rated banks, those with ratings of 1,2 or 3
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16. Loan Committee
Two or three committees deal with major credit decisions: an officers’ loan committee, a directors’ loan committee, & for banks with an excessive number of troubled loans, a “special assets” committee. The duties of the committee’s are as follows:
Reviews major new loans.
Review major loan renewals * ascertain the reasons for renewal.
Review delinquent loans & determine the cause of delinquency.
Ensure compliance with stated bank policy.
Ensure full documentation of loans.
Ensure consistency in the treatment of loan customers.
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17. Loan Approval Process
The three fundamental elements of the loan approval process:
Delegation of Authority
Uniform Presentation Format & Standards
Descriptions of the client
Assessment of management
Purpose of the loan request.
Repayment schedule & source of repayment
Secondary sources of repayment including collateral values & guarantors.
History of past borrowing with the bank
Required monitoring steps, including timing of submissions of financial statement.
Sponsoring officer’s comments, including consistency with policy.
The loan Decision.
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