credit monitoring.1997 2003

8/9/2019 Credit Monitoring.1997 2003

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Credit MonitoringBy maintaining goodcommunication with the borrowers,by providing advisory services at

the time of adverse situation andby collecting information fromoutside such as clientscompetitors, suppliers, customers,and regulators and also from

published reports in the dailynewspapers, magazines and tradepublications, a credit ocer canprevent the problem loan beforehappening.


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Monitoringprogram shouldinclude

A periodic reviewof all or selected loans toensure that they are consistent with banloan policy, documentation re!uirements,

pro"tability re!uirements, and so forth#A grading of loan !uality as measured by

ey indicators# and

$%ternal and internal audit that consider

not only the !uality of bans portfolio, butmay also encompass the entire lendingfunction from ban loan policy on down.


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Scope of Review

&ecisions about which loans to be reviewed and

how often largely depends on loan size,comple%ity, and the credit review policy of theinstitution.

'redit review policy of the institution setguidelines which area of lending, what ma%imum

amount of credit, what percentage of total creditand the circumstances of review. (ome institutionsdetermined that all loans or commitments of overcertain amount or more, regardless of location,lending area, are eligible for review.

'redit review policy might include large loans andcollateral that could rapidly deteriorate in valuefor regular reviews, while loans that fall bellow acertain amount threshold might not be reviewedat all.


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Approaches of LoanReview

)n passive approach, of loan review, creditreviewers review the credit "les and other loandocuments available to them with or withoutdiscuss with the lending ocers, even theproblem loans cases.

)n active approach, the reviewer reviews up todate credit "le, comments, appraise value of

e!uipment or real estate, e%amine receivables,payables, inventory, personal statements, morerecent "nancial statements and so forth inaddition to passive approach


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Goal of Loan ReviewFunction

*rime goal of loan review is to detect problemloan to reduce loan losses.

'redit reviewer prepares a review report for thecredit ocer and for the top management to tae

necessary actions. 'redit report should includesthe following+

a-(oundness of loan portfolio, its li!uidity andpro"tability#

b- $valuation of loan ocers, loan ocersupervision, adherence to laws and regulations,loan policy, and loan approval procedures#

c- ote and collateral departments operations.


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A Loan Review ChecklistA loan reviewer should concentrate his/her attention to the

following areas+ Purpose: 0he reviewer should consider whether the

borrowers use the loan stated for the purpose,

Loan repa!ent sources and ter!+ Both repaymentsources and term are stated in the loan documents. 0hereviewer should evaluate whether loan repayment and sourcesare in conformity with the terms and condition stated in theloan documents,

Financial condition of the "orrowers: 1oan reviewerreviews the ey elements of the "nancial statements of theborrowers and maes comment on whether any improvements

or deterioration in the borrowers cash 2ow, ey ratios, and soforth,


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A Loan Review Checklist

#ocu!entation: By physical inspection ofdocuments, the borrowers compliance with theagreements armative and negativecovenants should be veri"ed,

Collateral:Many loan losses are a direct result

of collateral that was lost, improperlydocumented or in such poor condition that ithad little li!uidation value. 0he loan reviewshould include physical inspection of collateraland an e%amination of collateral records,

Credit checks$

Pro%ta"ilit$ and

Regulator co!pliance&


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Loan Review Sste!s Auto!ated reporting$ bans use a software

pacage which ensures the automated reporting ofnew and renewed loans, loans over certain limit,past due loans, loans by rate level, participationrelation analysis, ocers portfolio pro"le, loans overban limit. Bans mae these reports available

periodically at various places within theorganization. 0he intent of this review is not only tomonitor individual position of credit but also todetect trends which may re!uire in3depth analysisand possible management action.

'n actual sste! there are three tier loan reviewsystem. )n three tier systems, all loans are classi"edas "rst tire, second tire, and third tire on the basis ofloans volume and some other selected criteria.


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Risk Coding( Loan Grades

Types of loan Substandard Doubtful Bad and loss

Continuous loans Non payment/ Renewal

within 3 moths or 6

months after expiry

date

Classified as

substandard for 6 to 12

months

Classified as doubtful

for 12 months or more

Demand loans Non payment within 3months or 6 months

after expiry date

Classified assubstandard for 6 to 12

months.

Classified as doubtfulfor 12 months or more

Fixed term loans

!p"to fi#e years$

%nstallment default for

more than 6 months.

Classified as

substandard more than

12 months


more than 1& months

Fixed term loans more

than fi#e years$

%nstallment default

more than 12 months

Classified as

substandard more than

1& months


more than 2' months

(hort" term )*ri+ulture

and ,i+ro"Credit

-#erdue more than 12

months

-#erdue more than 36

months

-#erdue more than 6

months


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Risk Coding( Loan Grades

Types of

Loan

Classified Substandard Doubtful Bad and Loss

Continuousoan

-n the expiryof due date ornot renewal

Classifiedmore than 6months but

not more than0 months


not o#er12months

Classified for12 months andmore

Demandoan

-n the expiryof due date ornot renewal.


less than 0months


less than12months

Classifiedmore than 12months and

more


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)e 'ngredients in the LoanReview Sste!

A good loan policy is a guide line for the creditocers. A good credit policy, a goodadministrative system, accurate informationand, of course, a savvy senior management

are ey for success in loan review. 4eviews aremade on the basis of information, and thesuccess of review greatly depends on theaccuracy of information. 0o ensure itsaccuracy, information must be tested from anindependent, unbiased perspective. 5or maingloan review accurate, a separate loan reviewdepartment headed by one man withcommercial lending e%perience and commonsense is needed.


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Principles of *+ectiveLoan Review

Avoid the gotcha approach in words andactions,

'ommunicate in timely way. &o not spring

surprises, touch base with the involvedparties, and get the full story,

6ive credit where credit is due#acnowledge when the line initiates action.

7se the team approach. As 89ow can we"% this:; versus 89ow did this get broen:;


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Avoid sharp and pricly ad?@,@@@ loan probablyis not an important issue on a >?@ million loan, Avoid


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Mae sure your constituents nowthat you recognize ris grading is asmuch art as it may be science and

that you are e!ually open toupgrading as downgrading, and

)f it does not mae sense, it is

probably wrong.


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,hich Sste! is "est-

A loan review system is the best for a banis dependent on the ris tolerance andcredit culture of the ban. (ystem which isbest suited in one ban may not be

completely applicable to another ban. )nsome respect it also taes intoconsideration the overall "nancial conditionof the ban, its size, and its geographicfootprint, the mi% of the bans portfolio

among consumer loans, small3businessloans. 1arge commercial loans mayin2uence the direction and scope of a loanreview process.

P "l l


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Pro"le! loans'denti%cation and

Resolution 1oan losses can beminimized by earlydetection of problemand its ecient

handling.


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#e%nition of Pro"le!Loan

Behrens ?- de"nes problem loanas+

A problem loan can also be de"ned as

one in which there is a ma


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Baning 'ompany 4evised-Act D@@?

?- )n case of continuous loan or call loan+En the e%piry of due date, D- 0erm loanMaturity less than F Gear-+ En the e%piry

of installment due date, H- 0erm loanMaturity more than F years-+ En thee%piry of I month of the installment date,J- Agriculture and small loan+ En the

e%piry of I month of the due date, andF- Any overdue loan should be treatedas problem loans. B4*& 'ircular o.?@May ?J, D@@?-


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*arl Sign of Pro"le!loans

?- 1ac of pro"tability, D- 9igh/risingleverage, H- 1ow/decreasing li!uidity, J-1ow collection of accounts receivables, F-

(low turn of inventory, I-Kea/decreasing e!uity, L- )ncrease inaccounts payable, - 1oans to ocersand stocholders, - 5raudulent of"nancial information, ?@- &elin!uency orother default, ??- 5ailure to provideinformation, ?D- 5amily and maritalproblems, ?H- 4apid business e%pansion,


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*arl Sign of Pro"le!loans

?J- 'hanges in management, ?F- 'hangein accountants, ?I- &eclining sales, ?L-'hange in product mi%, ?- 1oss of eyemployees, ?- 'ollateral problems, D@-1arge/4ising insider transactions, D?-'hanges in accounting methods or auditors,DD- 4e3negotiations of loan covenants, DH-'ancellation of insurance, DJ- )nvestment

in non3related venture, DF- udgments andta% liens, DI- 'oncentrations, and DL-'hanges in customer mi%.


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Causes of Pro"le! Loans

?- ot paying attention to written loanpolicy, D- 9aving no real initiative todetermine the purpose of the loan, H-&oing improper credit wor, J- otunderstanding the business being"nanced, F- 5ailing to address repaymentrealistically, I- 4elying too heavily oncollateral, L- 4efusing to admit a problem,

- Being la% with borrowers who are pastdue, - *rocrastinating, and ?@- 5ailure into the renewal/reduction syndrome.


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.andling Pro"le! loans(Loan work/out

0he following techni!ues are usuallyused for handling problem loans:

?- *roviding advisory/counselingservices, D- &eputingrepresentatives in the managementposition of borrowers organizations,

H- 4escheduling of credit, and J-Kaiver of interest.

Alternatives to Collect


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Alternatives to CollectPro"le! Loans

7sually loan recovery drives can be+ ?-'ompromise settlement, D- 'reditorsarrangement, H- )nvoluntary banruptcy,

J- o action, F- Noluntary li!uidation, I-1egal action for repossession and sale ofcollateral, L- 1egal action againstborrowers, - 1egal action againstguarantor, - (ale of loan to independentorganization Behrens ?, DFH3DF-,and ?@- Appointment of an organizationfor recovery of default loan.


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Recover of Credit

Bans are using many alternatives forrecovery of problem loans. (ome bansare using moral persuasion to recover

problem credit, some bans sale the loanto other party, some appoint third partyto recover loan. )f all these techni!uescome in to failiure to recover credit then

lenders have no alternative rather tainglegal action against borrower to recoverloan.

credit monitoring.1997 2003

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