Policy means action or procedure conforming to or considered with reference to prudence or expediency.
Bank lending policy refers to the policy and guidelines adopted by a bank in order to make its lending process systematic and methodical.
Banks deal with other people’s money.
They lend the money which they themselves borrow from the depositors.
Unless these deposits are prudently utilized banks are destined to incur losses.
Banks cannot effort to either keep the deposits idle in the vaults or lend the deposits and not recollect. Hence, it is essential that a proper lending policy is in place.
6 steps in the lending process are;
- Finding prospective loan customers,
- Evaluating a prospective customer’s character and sincerity of purpose,
- Making site visits and evaluating a prospective customer’s credit record,
- Evaluating a prospective customer’s financial condition,
- Assessing possible loan collateral and signing the loan agreement,
- Monitoring compliance with the loan agreement and other customer service needs.
These are explained below;
1. 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 request, often arise from contacts the loan officers and sales representatives make as they solicit new accounts form firms operating in the lender’s market area.
2. 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, giving the customer the opportunity to explain his/her credit needs.
That interview is particularly important because it provides an opportunity for the loan officer to assess the customer’s character and sincerity of purpose.
If the customer appears to lack 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.
Related: 7C of Creditworthiness
3. 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 the condition of the property and to ask clarifying questions. The loan officer” may contact other creditors who have previously loaned money to this customer to see what their experience has been.
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 sense of responsibility in making use of credit extended by a lending institution.
Related: 3 Steps of Credit Analysis
4. 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 in order 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, aimed at determining whether the customer has sufficient cash flow and backup assets to repay the loan.
The credit analysis division then prepares a brief 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 the strong and weak points of a loan request.
5. Assessing possible loan collateral and signing the loan agreement
If the loan committee approves the customer’s request, the loan officer or the credit committee will usually check on the property or other assets to be pledged as collateral in order 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.
6. 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 payments of principal and interest being made as promised, for larger commercial credits, the loan officer will visit the customer’s business periodically to check on the firm’s progress and see what 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 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.