Loan servicing is the administration aspect of a loan from the time the proceeds are dispersed

until the loan is paid off. This includes sending monthly payment statements, collecting monthly
payments, maintaining records, collecting and paying taxes and insurance, remitting funds, and
following up on delinquencies. In exchange for performing these activities, Servicers are
normally compensated by receiving a percentage of the unpaid balance on the loans they service.
Generally such services are provided by servicing companies, however, banks can increase their
income by performing these activities on their own. Following are the ways 1. Retaining servicing rights on the loans they have sold and earning fees from the current
owners of those loans.
2. Generating fee income by collecting interest and
3. Increasing income by collecting principal payments from borrowers and passing the
proceeds along to loan buyers.
A standby letter of credit is a guarantee of payment issued by a bank on behalf of a client as
"payment of last resort", if the client fails to fulfill a contractual commitment with a third party.
It presents the issuer with the danger that the customer will default in future
i.e. the issuers contingent obligation will become an actual liability, due and payable.
This may cause a liquidity squeeze for the issuer.
However, the lending institutions can use various devices to reduce risk exposure. One of these
is, by frequently renegotiating the terms of any loans extended to customers who have SLCs so
that loan terms are continually adjusted to the customers changing circumstances and there is
less need for beneficiaries to press for collection. Another way is to diversify SLCs issued by
region and by industry to avoid concentration of risk exposure. Selling their participations in
SLCs in order to share risk with other lending institutions.