Important Elements of a Written Loan Policy

Assignment # 4

1) One of the most important ways a bank can make sure its loans meet regulatory standards and are profitable is by establishing a written loan policy. A loan policy gives loan officers and the bank’s management specific guidelines in making some loan decisions and in shaping the over all portfolios of the bank. The following are the most important elements of a Written Loan Policy;

1. Statements of Lending: A statement that defines the type of loan, its maturities, quality and the size of loans.

2. Establish a Lending Authority: It should clearly define who is authorized to a loan

3. Establish Lines of Responsibility: It is making sure that all the information is reported to its department.

4. Operating Procedure: There should be appropriate operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan application.

5. Required Documents: All the required documents should be obtained for every loan application and must be filed properly.

6. Lines of Authority: Responsibility for maintaining and reviewing the bank’s credit files should be well defined.

7. Guidelines: Proper guidelines must be given as to how you can take a loan, evaluate it and perfect a loan.

8. Policies’ & Procedures: Policies’ & Procedures for establishing interest rates, payments, fees and repayments must be present.

9. Establish Quality Standards: A statement of quality standards applicable to all loans. That is, if a person does not meet the standards then the loan should be denied.

10. Establishing Upper Limit to Loans: A statement defining the upper limit to a loan beyond which a loan cannot be allowed

11. Define its Community: A description of the bank’s principal trade area, which most loans should come from.

12. Trouble Loan: A discussion of the preferred procedures for detecting, analyzing, and working out problem loan situations.

For loan to be good three conditions should be fulfilled, ie. First that the borrower should be creditworthy. Which could be known by a detailed study of the following six aspects:

• Character: The loan officer must know the purpose of the loan and make sure that the customer will be able to make the repayment of the loan. He should also determine that the borrower has a responsible attitude towards using borrowed funds, is truthful in answering the bank’s questions and willing to make every effort to repay what is owned.

• Capacity: The loan officer must make sure the borrower has the authority to request a loan and the legal standing to sign a loan agreement.

• Cash: The loan officer should make sure that the borrower has a stable stream of income and the ability to repay the loan.