MCF 304: Bank Management

1. MCF 304: Bank Management Lecture 4.1 Lending Policy

2. Lending Policy Loan assets constitutes a large portion of banks assets while interest income derived from customers loan make up a large part of bank income Since lending is a key activity, every bank must have its own clear, accurate and documented lending policy

3. Lending Policy Lending policies must be aligned to three main principles; Principle of payment Principle of objective Principle of protection

4. The Importance of Lending Policy Lending activities represent one key contributor to the achievement of banking objectives. They fulfill the valid credit needs of the society A loan that satisfy a valid credit needs means a loan with a purpose that is both legal & relevant to the society

5. The Importance of Lending Policy Loans are important intermediaries that shape & maintain the relationship between banks & its deposits customers The return of loans is higher than any other investment of the bank Process of lending;

6. Principle of Lending Banks are always faced with the problem of asymmetric information since banks always have less information on customers future information than the customers themselves Customers will always try to conceal adverse information on themselves

7. Asymmetric Information Problem Adverse Selection - Due to incomplete information, banks may make incorrect decision and suffer from losses later Moral Hazard - After the loan was granted, the borrower appetite for loans may have increased to higher risk exposure

8. Principle of Purpose Banks must ensure that the purpose of loans are consistent with its lending policy Loans without any real and concrete purpose are bound to be problematic If the bank is unclear about the purpose of the loan, there is a big possibility that its repayment capability will also be questionable

9. Principle of Payment Banks must set systematic & realistic repayment schedule for customer before any loan is approved so that the repayment process can be monitored This will enable the bank to detect any signs of problematic loan

10. Principle Protection A bank can protect its interest by requiring customers to provide collateral for their loans Positive terms; e.g submission by borrower on periodic financial ststements Negative terms; e.g restriction of dividend payment

11. Documented Lending Policy Bank’s lending policy usually symbolized the bank’s lending philosophy & concepts Lending policy should be documented as its is an official guide for all credit officer Documented lending policy can also be used to evaluate the performance of credit / loan officer

12. Documented Lending Policy Documented lending policy are required for the following purposes; Setting directions including the pertaining to bank full utilization Controlling the composition and size of loan portfolio Determining which or what loans should be granted

13. Documented Lending Policy Bank without lending policy is faced with two dangers; Decision making are made by certain clusters only It will result in non-standardize loan philosophy & practice

14. Elements for Comprehensive Loan Policy The objectives of lending Authority line Credit criteria Procedure & controls Staff loans Criteria for handling NPL’s Criteria for auctions

15. Elements for Comprehensive Loan Policy Compliance procedures Procedures on periodic review of credit policy

16. Thank You! Izdihar Baharin @ Md Daud Post Graduate Centre HP: 006019-5170817 Email: izdi@oum.edu.my