Bank Lending: Policies & Procedures

Bank Lending: Policies & ProceduresChapter 17Banking course

How banks decide how much to lend?Who to lend?Where should be the concentration?Key decision: Will the bank decide to lend across all sectors or will it be selective?How much to lendAuthority-Presidents Council BM SVPLending capacity next 6 months lend out 100 billion. One party will not get more than 1 billionGearing ratioWho to lend:Sectors distributionMaturityGeographic distributionSocial classesSize of the bank matters when deciding who to lendFor most banks, loans account for half or more of their total assets and about half to 2/3 of their revenues.Moreover, risk in banking tends to be concentrated in the loan portfolio

Types of Loans made by Banks:Real estate loansFinancial institution loansAgricultural loansCommercial and industrial loansLoans to individualsLease financing receivablesFactors determining the growth and mix of bank loansProfile of characteristics of the market area it servesParticipations with other banksBank size : (larger banks are typically wholesale lenders and smaller banks tend to emphasize retail credit) The experience and expertise of managementOfficial loan policy

Regulation of Lending:The loan portfolio has more to do with risk and safety than any other aspect of the banking business. Some loans are restricted or prohibited by law.Loans that are performing well but have minor weaknesses because the bank has not followed its own loan policy or has failed to get full documentation from the borrower are called criticized loans.Loans that appear to contain significant weaknesses or that represent what is dangerous concentration of credit in one borrower or in one industry are called scheduled loans.

When some loans carry an immediate risk of not paying out as planned, these credits are adversely classified. These are placed into 3 groupings:Substandard loansDoubtful loansLoss loansBanks performance is rated by quality of loans and other bank assets and also by numerical ratings are also assigned based on banks capital adequacy, management quality, earnings record, liquidity position and sensitivity to market risk exposure.

All six dimensions of banks performance are combined into one overall numerical rating. CAMELS rating. The letters are derived from:Capital adequacyAsset qualityManagement qualityEarnings recordLiquidity positionSensitivity to market riskEstablishing a written Loan Policy:A goal statement for the banks loan portfolioSpecification of the lending authority given to each loan office and loan committeeLines of responsibility in making assignments and reporting information within the loan dept.Operating procedures for soliciting, reviewing , evaluating and making decisions on customer loan applications.The required documentation that is to accompany each loan application and what must be kept in the banks credit filesLines of authority within the bank, detailing who is responsible for maintaining and reviewing the banks credit filesGuidelines for taking, evaluating and perfecting loan collateral.A presentation of policies and procedures for setting loan interest rates and fees

Loan processOrigination / applicationDocumentationCredit check NegotiationPresentationLoan approvalLoan signing ceremonyDisbursementMonitoringDocumentationCNICNTNBank StatementsFinancial statementsEmployees letter/ pay slipsForecasted financial statementsFeasibility reportAsset documentsGuarantor's CNIC, Co-signers CNICCredit CheckCIB Financial ratiosAssets valueInterview

NegotiationFour parties involveLoan applicantApplicant's legal departments representativeLoan officerBanks legal departments representativeDiscuss about:Interest rateDisbursement scheduleClaim on collateral Early repayment

Disbursement schedule DateDisbursement Clauseon the day of approval10 milliontwo months20 millionAll requirement for building is completedfour months10 millionBasic structure is completetwo months2 millionBuilding is finishedDear Madam Faiza,Below is the list of documents required:Your Documents:CNIC copy2 Passport size PhotographsCopy of Appointment letter, Resignation and Experience letter from LSE when leftCopies of last 2-3 months salary slips before leaving LSECopy of Appointment Letter (When joined again)Copies of last 2-3 months salary slips after joining againEmployment Certificate from LSE mentioning the designation, permanent status, date of joining and salary drawnLast 3 years Salary Account Bank Statement (from 1st March 2011 till date)Further may be asked during the processYour Husband's required Documents:CNIC copy2 Passport size PhotographsCopy of Appointment letterCopies of last 3 months salary slipsEmployment Certificate from Employer mentioning the designation, permanent status, date of joining and salary drawnLast 3 years Salary Account Bank Statement (1st March 2011 till dateor since whatever applicable can be provided)

Initial Processing Charges (Stage- 1):

Rs. 11832 cash deposit in Dubai Islamic Bank Gulberg Branch

Further charges will be required after property selecion that applies: Legal opinion by the lawyer on the property selected and property appraisal (Valuation) charges (3500+3500).