Policy means action or procedure conforming to or considered concerning prudence or expediency. Bank lending policy refers to the policy and guidelines adopted by a bank to make the lending process systematic and methodical.
Banks deal with other people’s money, and they lend the money they borrow from the depositors. Unless these deposits are prudently utilized, banks are destined to incur losses. Banks cannot keep the deposits idle in the vaults or lend the deposits and not recollect them.
Hence, a proper lending policy must be in place.
6 steps in the lending process are;
These are explained below;
Finding prospective loan customers
Most loans to individuals arise from a direct request from a customer who approaches a member of the lender’s staff and asks to fill out a loan application.
On the other hand, business loan requests often arise from contacts the loan officers and sales representatives make as they solicit new accounts from firms operating in the lender’s market area.
Evaluating a prospective customer’s character and sincerity of purpose
Once a customer decides to request a loan, an interview with a loan officer usually follows, allowing them to explain their credit needs.
That interview is significant because it allows the loan officer to assess the customer’s character and sincerity of purpose.
If the customer lacks sincerity in acknowledging the need to adhere to the terms of a loan, this must be recorded as a strong factor weighing against approval to the loan request.
Making site visits and evaluating a prospective customer’s credit record
IT a business or mortgage loan is applied for. A loan officer often makes a site visit to assess the customer’s location and property condition and ask clarifying questions.
The loan officer” may contact other creditors who have previously loaned money to this customer to see their experience.
Did the customer fully adhere to previous loan agreements and, where required, keep satisfactory deposit balances?
A previous payment record often reveals much about the customer’s character, the sincerity of purpose, and a sense of responsibility in using credit extended by a lending institution.
Evaluating a prospective customer’s financial condition
If all is favorable to this point, the customer is asked to submit several crucial documents the lender needs to fully evaluate the loan request, including complete financial statements and, in the case of a corporation, board of directors’ resolutions authorizing the negotiation of a loan with the lender.
Once all documents are on file, the lender’s credit analysis division conducts a thorough financial analysis of the applicant to determine whether the customer has sufficient cash flow and backup assets to repay the loan.
The credit analysis division then prepares a summary and recommendation, which goes to the appropriate loan committee for approval.
On large loans, members of the credit analysis division may give an oral presentation, and discussion will ensue between staff analysts and the loan committee over a loan request’s strong and weak points.
Assessing possible loan collateral and signing the loan agreement
Suppose the loan committee approves the customer’s request. In that case, the loan officer or the credit committee will usually check on the property or other assets to be pledged as collateral to ensure that the lending institution has immediate access to the collateral or can acquire title to the property involved if the loan agreement has defaulted.
Once the loan officer and the loan committee are satisfied that both the loan and the proposed collateral are sound, the note and other documents that make up a loan agreement are prepared and signed by all parties to the agreement.
Monitoring compliance with the loan agreement and other customer service needs
The new agreement must be monitored continuously to ensure that the terms of the loan are being followed and that all required principal and interest payments are being made as promised. For larger commercial credits, the loan officer will periodically visit the customer’s business to check on the firm’s progress and see other services the customer may need.
Usually, a loan officer or other staff members enter information about a new loan customer in a computer file known as a customer profile.
This file shows what services the customer is currently using and contains other information required by management to monitor a customer’s progress and financial service needs.