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Wednesday, May 15, 2013

Hi Bank Manager! Ponder Over the Following While Granting Loans

At the Time of Entertaining a Loan Request

  • Every credit proposal needs to be handled diligently and intelligently, for sanctioning a loan, is nothing but putting bank’s capital at risk.
  • Yet, credit is ‘crucial’ for a financial intermediary like bank. Manager can add value to his raw material i.e. deposits & earn profits only by unbundling it as credit among prospective borrowers.
  • Every ‘credit’ request is a challenge to the ingenuity of the Manager, for he has to chose a customer who can be relied on  to earn profit.
  • Conversing with a prospective borrower-customer is an opportunity to learn more about the person, his business, and the economic conditions in general under which he is carrying out his business. Such knowledge alone paves way for a performing credit portfolio.
  • Listen to the borrower-customer without a pre-conceived notion of him.  One should allow the customer to speak uninterruptedly and ask questions only after he completes his presentation.
  • Remember! Credit officer is always fighting against the – ‘asymmetry of information’ i.e. all that an owner/borrower knows about his business is not known to the credit processing officer. Plus, no Manager can know all the businesses under the sky. So, one should be willing to listen and understood the proponent’s business. Don’t feel shy to ask questions, however silly they may sound,  till you understand the business proposition thoroughly.
  • Never ever commit to a borrower without evaluating the safety of funds—both technically and legally— to be lent
  • At each stage of discussion no room for misinterpretation or ambiguity be allowed to the prospective borrower
  • Manager should never ever make a premature statement, for he would later get entangled in justifying the statement and in the process lose the scope for arriving at a logical decision .
  • Manager should always look at a loan proposal from its totality.  Financial data alone is not sufficient to evaluate a credit proposal.  The environment in which the financial projections are to be realized, also needs to be analyzed.
  • Non-financial factors like product, competition, business cycles, government policies, etc that have an impact on the unit’s functioning are as important as the financial factors.
  • Manager should always remember that he is representing bank’s interest.  Every decision that he takes should therefore benefit the bank.  
  • Prime consideration for granting an advance should be the ability of the business to generate sufficient cash flows but not the value of the security offered.  
  • Do not call for information in piecemeal. Quick decisions make a manager darling of the clientele.
While Granting a Loan

Before an advance is recommended or sanctioned, Manager should thoroughly examine the loan request and be satisfied of the following: 
  • Purpose of loan is in conformity with the bank’s internal policy;
  • Commercial and economic logic of the purpose to be financed;
  • Adherence to the laws of the land & directives issued by regulatory authorities
  • Ability and experience of the proponent/management to handle the proposed venture;
  • Adequacy of loan sought for the proposed activity
  • Risk-reward ratio;
  • Repayment sources and the flexibility there under
  • Securities being proposed, their market value vis-à-vis loan, feasibility of valid creation of charges, and their marketability
  • Conformity with prudential norms.
  • Character, Financial Resources, Competence, Initiative, Intelligence, Drive and energy, the underlying intent of the Promoters/Directors of the loan seeking company.
  • Ability of the business to generate the projected cash flows and the propensity of the borrower to make use of the future cash flows towards the repayment of debt. 

While refusing a Loan—
  • Manager should satisfy himself of having taken cognizance of basic tenets of rationale decision-making viz. 
    • Got the request of the borrower quite straight
    • Being turned down because the borrower is undesirable
    • Not because the advance/proponent is not to the liking of the manager
    • Because project/business is not viable
    • Connections of the borrower with the bank have taken note of
  • Once a Manager decides to turn down a loan application, it should be conveyed promptly—in straight terms with of course no demeaning intentions. 
  • Inquiries received from RBI, Govt. agencies and VIPs relating to credit refusals etc. are to be attended to with promptitude since they have a bearing on Bank’s image. 
When disbursing an advance
  • Convey the sanction particulars to the customer and get an acknowledgement thereof, before disbursing the loan.
  • Ensure that credit is made available timely.
  • Ensure that borrower complies with all the terms and conditions of sanction and creates securities as proposed before the loan is disbursed.
  • Manager should always remember that any advance granted by the bank to a constituent has to be used for the purpose for which it has been granted and no diversion should be allowed.
  • Cash withdrawals are to be monitored meticulously because, it is usually observed that cash withdrawals facilitate easy diversion of funds.
  • It is mandatory for branches to question the cash withdrawals and be satisfied of their relevance.  They may ask for valid explanation for such cash withdrawals in writing.
  • Bank is entitled to demand repayment of the advance if it is found that the borrower had diverted the advance for any purpose other than the one for which it was granted, as permitted by the documents signed by the borrower. 
After disbursing a loan 
  • Having disbursed a loan branch has not paved the way for an enduring relationship with the borrower but also it became a major stakeholder of the firm/company.
  • Managers have to therefore, maintain a close watch on the happenings in the assisted unit to ensure that the borrower is carrying out the business as envisaged in the sanction proposal. Else, the projected cash flows and in turn the anticipated repayments are likely to go awry.
  • A Manager should always keep his eyes and ears glued to his borrowers’ activities and their style of living, for past track record need not necessarily hold good for tomorrow.
  • The efficiency and effectiveness of a Manager reflects on his ability in maintaining a healthy credit portfolio. 
Keywords: Granting bank loans, Credit portfolio of banks, sanctioning of loans by banks


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