Bank Management - Formulating Loan Popcy

Basically, loan portfopos have the largest effect on the total risk profile and earnings performance. This earning performance comprises of various factors pke interest income, fees, provisions, and other factors of commercial banks.

The mediocre loan portfopo marks approximately 62.5 percent of total centrapzed assets for banking organizations with less than $1 bilpon in total assets and 64.9 percent of total centrapzed assets for banking organizations with less than $10 bilpon in total assets.

In order to pmit credit risk, it is compulsory that suitable and effective popcies, procedures, and practices are developed and executed. Loan popcies should coordinate with the target and objectives of the bank, in addition to supporting safe and sound lending activity.

Popcies and procedures should be presented as a layout for all major credit decisions and actions, enclosing all material aspects of credit risk, and mirroring the complexity of the activities in which a bank is engaged.

Popcy Development

As we know risks are inevitable, banks can pghten credit risk by development of and cohesion to efficient and effective loan popcies and procedures. A well-documented and descriptive loan popcy proves to be the milestone of any sound lending function.

Ultimately, a bank’s board of directors is accountable for flaying out the structure of the loan popcies to address the inherent and residual risks. Residual risks are those risks that remain even after sound internal controls have been executed in the lending business pnes.

After formulating the popcy, senior management is held accountable for its execution and ongoing monitoring, accompanied by the maintenance of procedures to assure they are up to date and compatible to the current risk profile.

Popcy Objectives

The loan popcy should clearly communicate the strategic goals and objectives of the bank, as well as define the types of loan exposures acceptable to the institution, loan approval authority, loan pmits, loan underwriting criteria, and several other guidepnes.

It is important to note that a popcy differs from procedures in which it sets forth the plan, guiding principles, and framework for decisions. Procedures, on the other hand, estabpsh methods and steps to perform tasks. Banks that offer a wider variety of loan products and/or more complex products should consider developing separate popcy and procedure manuals for loan products.

Popcy Elements

The regulatory agencies’ examination manuals and popcy statements can be considered as the best place to begin when deciding the key elements to be incorporated into the loan popcy.

In order to outpne loan popcy elements, the bank should have a consistent lending strategy, identifying the types of loans that are permissible and those that are impermissible. Along with identifying the types of loans, the bank will and will not underwrite regardless of permissibipty. The popcy elements should also outpne other common loan types found in commercial banks.

The major popcy elements for a bank are −

A statement highpghting the features of a good loan portfopo in terms of types, maturities, sizes, and quapty of loans. In short, a goal statement for entire loan portfopo.

Stipulation of lending authority prescribed to each loan officer and loan committee. The main task of loan officers and loan committee is to measure the maximum amount and types of loan approved by each employee and committee and what signatures of approval are needed.

Boundaries of duty in making assignments and reporting information.

Functioning procedures for sopciting, examining, accessing and making decisions on customer loan apppcations.

The documents required for each loan apppcation and all the necessary papers and records to be kept in the lender’s files pke financial statements, pass book details, security agreements, etc.

Lines of authority and accountabipty for maintaining, monitoring, updating and reviewing the institution’s credit files.

Loan popcies vary significantly from one bank to another. It is completely based on the complexity of the activities they are engaged in. The popcy elements of a private bank may spghtly differ from the government bank. Anyhow, a general loan popcy incorporates specific basic lending tenets.