Introduction of Loan Portfolio

Lending is a key business activity in the financial services sector. ... Whether due to lenient
credit standards, poor portfolio risk management, or weaknesses in the economy, loan portfolio
problems have historically been among the major cause of financial institutions' losses and
failures.

Loan portfolios are the major asset of banks, thrifts, and other lending institutions. The value of
a loan portfolio depends not only on the interest rates earned on the loans, but also on the
quality or likelihood that interest and principal will be paid.

Objectives of Loan Portfolio

A primary objective of loan portfolio management is to control the strategic risk associated with
a bank's lending activities. Inappropriate strategic or tactical decisions about underwriting
standards, loan portfolio growth, new loan products, or geographic and demographic markets
can compromise a bank's future.

Loan Portfolio Objectives

Loan portfolio objectives establish specific, measurable goals for the
portfolio. They are an outgrowth of the credit culture and risk profile. The
board of directors must ensure that loans are made with the following three
basic objectives in mind:
• To grant loans on a sound and collectible basis.
• To invest the bank’s funds profitably for the benefit of shareholders and
the protection of depositors.
• To serve the legitimate credit needs of their communities.

Strategic Planning for Loan Portfolio

Strategic Planning for the Loan Portfolio

For most banks, meeting these three objectives will require that senior
management and the board of directors develop medium- and long-term
strategic plans and objectives for the loan portfolio. These strategies should
be consistent with the strategic direction and risk tolerance of the institution.
They should be developed with a clear understanding of their risk/reward
consequences. They also should be reviewed periodically and modified as
appropriate. In drawing up strategic objectives, management and the board
should consider establishing:
• What proportion of the balance sheet the loan portfolio should
comprise.
• Goals for loan quality.
• Goals for portfolio diversification.
• How much the portfolio should contribute to the bank’s financial
objectives.
• Loan product mix.
• Loan growth targets by product, market, and portfolio segment.
• Product specialization.
• What the bank’s geographic markets should be.
• Targeted industries.
• Targeted market share.
• Community needs and service.
• General financial objectives (e.g., increase fee income)