MCF 304: Bank Management
Lecture 4.1
Lending Policy
1
Lending Policy
•
•
Loan assets constitutes a large portion of
banks assets while interest income derived
from customers loan make up a large part of
bank income
Since lending is a key activity, every bank
must have its own clear, accurate and
documented lending policy
2
Lending Policy
•
Lending policies must be aligned to three
main principles;
i. Principle of payment
ii. Principle of objective
iii. Principle of protection
3
The Importance of Lending Policy
• Lending activities represent one key
contributor to the achievement of banking
objectives. They fulfill the valid credit needs of
the society
• A loan that satisfy a valid credit needs means a
loan with a purpose that is both legal &
relevant to the society
4
The Importance of Lending Policy
•
•
•
Loans are important intermediaries that shape &
maintain the relationship between banks & its
deposits customers
The return of loans is higher than any other
investment of the bank
Process of lending;
5
Principle of Lending
•
•
Banks are always faced with the problem of
asymmetric information since banks always
have less information on customers future
information than the customers themselves
Customers will always try to conceal adverse
information on themselves
6
Asymmetric Information Problem
Adverse Selection
- Due to incomplete
information, banks may
make incorrect decision
and suffer from losses
later
Moral Hazard
- After the loan was
granted, the borrower
appetite for loans may
have increased to higher
risk exposure
7
Principle of Purpose
• Banks must ensure that the purpose of loans are
consistent with its lending policy
• Loans without any real and concrete purpose
are bound to be problematic
• If the bank is unclear about the purpose of the
loan, there is a big possibility that its
repayment capability will also be questionable
8
Principle of Payment
• Banks must set systematic & realistic
repayment schedule for customer before any
loan is approved so that the repayment process
can be monitored
• This will enable the bank to detect any signs of
problematic loan
9
Principle Protection
• A bank can protect its interest by requiring
customers to provide collateral for their loans
• Positive terms; e.g submission by borrower on
periodic financial ststements
• Negative terms; e.g restriction of dividend
payment
10
Documented Lending Policy
•
•
•
Bank’s lending policy usually symbolized the
bank’s lending philosophy & concepts
Lending policy should be documented as its
is an official guide for all credit officer
Documented lending policy can also be used
to evaluate the performance of credit / loan
officer
11
Documented Lending Policy
•
Documented lending policy are required for
the following purposes;
i. Setting directions including the pertaining to
bank full utilization
ii. Controlling the composition and size of loan
portfolio
iii. Determining which or what loans should be
granted
12
Documented Lending Policy
•
Bank without lending policy is faced with
two dangers;
i. Decision making are made by certain clusters
only
ii. It will result in non-standardize loan
philosophy & practice
13
Elements for
Comprehensive Loan Policy
i.
ii.
iii.
iv.
v.
vi.
vii.
The objectives of lending
Authority line
Credit criteria
Procedure & controls
Staff loans
Criteria for handling NPL’s
Criteria for auctions
14
Elements for
Comprehensive Loan Policy
viii.Compliance procedures
ix. Procedures on periodic review of credit
policy
15
Thank You!
Izdihar Baharin @ Md Daud
Post Graduate Centre
HP: 006019-5170817
Email: [email protected]
16