Loan Review and Control

Need for Credit Risk Monitoring

• To minimize credit loss

• To ensure return from funds

• To ensure compliance with the terms and conditions

mentioned in sanction letter

• To establish early alert process

• To take timely corrective actions

• To review borrower relationship

 Methods of Loan Monitoring
1. Off-site loan monitoring
• Periodic reports
• Operating statement and cash flow
• Identification of company’s major suppliers to know repayment
behavior
• Communication by letter and telephone call

3. On-site loan monitoring

• Visiting factory premise
• Informal meeting with the borrower on lunch or dinner
• Physical inspection to verify the status of collateral
Effective Credit Risk Monitoring
• Most banks’ loan monitoring programs include
a. A periodic review of all or selected loans to ensure that they are
consistent with bank loan policy, documentation requirements,
profitability target, and so forth.
b. Grading a loan quality measured by key indicators.
c. External and internal audit that considers not only the quality of the
bank’s loan portfolio, but also the entire lending function from bank loan
policy.

• Responsibilities of the credit officer

a. Communication between the bank and the borrower through letter,
telephone call, plant visit or social event like business lunch.
b. Open and honest dialogue between the bank and the borrower.
c. Monitoring the borrower’s check payment practices.
d. Contacting the company attorney, insurance agent or accountant.
e. Checking public records and the daily newspapers.
 Contd.
• Credit files
a. A record of the lending relationship and how it has evolved over time.
b. A reference sources of internal credit checks and for the exchange of credit
information with other financial institutions.
c. A picture of the client’s total account relationship that may prove useful in
selling other bank products and services.
d. A source of financial data.

• Contents and organization of credit files

a. Copies of loan documents
b. Financial information
c. Credit inquiries and reports
d. Collateral information
e. Correspondence and memos
f. Miscellaneous materials
Loan Review and Rating

A bank loan portfolio is made of thousands of loans. The quality of

some loans may go down, others may deviate from bank policy and
there may also be credit concentration. Hence loan review serves to
• Identify loans that have potential of becoming problems loans;

• Examine bank lending procedures and ensure that they comply with
loan policy and Bangladesh banks regulations;

• Assess the overall quality and composition of the loan portfolio;

• Ascertain the adequacy of bank loan loss reserves;

• Evaluate the competence of bank loan officers.

Loan Review and Rating
1.1 Organization and scope of bank loan review program

1.2 A loan review checklist

• Purpose
• Loan repayment source and term
• Financial condition of the borrower
• Documentation
• Collateral
• Credit checks
• Profitability
• Regulatory compliance