The students of Finance and Banking may find this topic relevant for them
BANKS’ LOAN POLICIES
Factors that influence a Banks’ Loan Policies:
The restrictions imposed by statutory law and administrative regulations do not provide answer to many questions. Regarding safe, sound and profitable bank lending, questions regarding the size of loan portfolio, desirable loan maturities, and the types of loans to be made are unanswered. These questions and many others about lending must be answered by each individual bank. Many banks have developed formal written lending policies in recent years. Although written lending policies serve a number of purposes, the most important is that they provide guidance for lending officers and thereby establish a greater degree of uniformity in leading practices. Since lending is important both to the bank and to the community it serves, loan policies must be worked out carefully after considering many factors. For the most part, these same factors determine the size and composition of the secondary reserve and the investment account of a bank. Some of the very important factors are mentioned here and discussed only briefly.
1. Capital Position
2. Risk and Profitability of various types of loans
3. Stability of deposits
4. Economic Conditions
5. Influence of monetary policy and fiscal policy.
6. Ability and experience of bank personnel
7. Credit needs of the area served.
The capital of a bank serves as cushion for the protection of the depositors’ fund. The size of the capital in relation to deposits influences the amount of risk that a bank can afford to take. Banks with a relatively large capital structure can make loans of longer maturities and greater credit risk.
Risks and Profitability of Different Types of loan:
Since earnings are necessary for successful operation of a bank, all banks consider this important factor in formulating loan policy. Some banks may emphasize earnings more than others.Banks with greater need for earnings might adopt more aggressive lending policies than those that do not consider earnings to be paramount. An aggressive lending Policy might call for making a relatively large amount of term or consumer loans, which normally are made at higher rates of interest than short-term business loans.
The stability of Deposits:
The fluctuation and types of deposits must be considered by a bank in formulating its loan policy. After adequate provisions have been made for the primary and secondary reserves, banks can then engage in lending. Even though these two reserves are designed to take care of predictable deposit fluctuations
and loan demands, unpredictable demands force banks to give consideration to the stability of deposits in formulating loan policy.
The economic conditions of the area served by a bank are important in determining its loan policy. A stable economy is more conducive to liberal loan policy than is one that is subject to seasonal and cyclical movements. Deposits of feast or famine economies (weak economies) fluctuate more violently than do deposits in an economy noted for its stability. Consideration must also be given to the national economy. Factors that adversely affect the nation as a whole, if they are of serious magnitude, eventually affect local conditions.
Monetary and Fiscal policies:
The lending ability of bank is also influenced by monetary and fiscal policies. If monetary and fiscal policies are expansionary and additional reserves are made available to the commercial banking system, the lending ability of bank is increased. Under these conditions banks can have more liberal loan policy than if the opposite situation exists.
The Expertise of Bank Personnel:
The expertise of lending personnel is not insignificant in the establishment of bank loan policy. For example, officers may have considerable ability and experience in business lending but practically none in making real estate loans, while in other banks their specialty may be consumer lending. One of the probable reasons that banks were slow in entering the consumer lending field is the lack of skilled personnel. Some banks may be so specialized in certain fields of lending that their presence may influence the loan policy of other banks.
The Area Served by Banks:
An obvious factor influencing a commercial bank’s loan policy is the area it serves. The major reason banks are chartered is to serve the credit needs of their communities. If this cannot be done, there is little justification for their existence. Banks are morally bound to extend credit to borrowers who present logical and economically sound loan requests. Banks in areas where the economy predominantly one of cattle raising, for example, cannot turn their back on this type of lending, but should tailor policy to fit the needs of this economic activity.
To be continued………..
The Tools Commercial Lenders Need and Use.....
The Formal Credit Analysis Procedure…………...
Structuring A Credit Proposal………………….......