Credit Monitoring

By maintaining good communication with the

borrowers, by providing advisory services at
the time of adverse situation and by
collecting information from outside such as
clients competitors, suppliers, customers,
and regulators and also from published
reports in the daily newspapers, magazines
and trade publications, a credit officer can
prevent the problem loan before happening.

Monitoring program should include

A periodic review of all or selected loans to
ensure that they are consistent with bank
loan policy, documentation requirements,
profitability requirements, and so forth;
A grading of loan quality as measured by key
indicators; and
External and internal audit that consider not
only the quality of banks portfolio, but may
also encompass the entire lending function
from bank loan policy on down.

Scope of Review
Decisions about which loans to be reviewed and how
often largely depends on loan size, complexity, and the
credit review policy of the institution.
Credit review policy of the institution set guidelines
which area of lending, what maximum amount of credit,
what percentage of total credit and the circumstances
of review. Some institutions determined that all loans or
commitments of over certain amount or more,
regardless of location, lending area, are eligible for
review. Credit review policy might include large loans
and collateral that could rapidly deteriorate in value for
regular reviews, while loans that fall bellow a certain
amount threshold might not be reviewed at all.

Approaches of Loan
Review
In passive approach of loan review, credit
reviewers review the credit files and other
loan documents available to them with or
without discuss with the lending officers,
even the problem loans cases.
In active approach, the reviewer reviews
up to date credit file, comments, appraise
value of equipment or real estate,
examine receivables, payables, inventory,
personal statements, more recent financial
statements and so forth in addition to

Goal of Loan Review

Function
Prime goal of loan review is to detect problem loan to
reduce loan losses.
Credit reviewer prepares a review report for the
credit officer and for the top management to take
necessary actions. Credit report should includes the
following:
(a)Soundness of loan portfolio, its liquidity and
profitability;
(b) Evaluation of loan officers, loan officer supervision,
adherence to laws and regulations, loan policy, and
loan approval procedures;
(c) Note and collateral departments operations.

A Loan Review Checklist

A loan reviewer should concentrate his/her attention to the

following areas:
Purpose: The reviewer should consider whether the
borrowers use the loan stated for the purpose,
Loan repayment sources and term: Both repayment
sources and term are stated in the loan documents. The
reviewer should evaluate whether loan repayment and
sources are in conformity with the terms and condition
stated in the loan documents,
Financial condition of the borrowers: Loan reviewer
reviews the key elements of the financial statements of the
borrowers and makes comment on whether any
improvements or deterioration in the borrowers cash flow,
key ratios, and so forth,

A Loan Review Checklist

Documentation:
By
physical
inspection
of
documents, the borrowers compliance with the
agreements affirmative and negative covenants
should be verified,
Collateral: Many loan losses are a direct result of
collateral that was lost, improperly documented or in
such poor condition that it had little liquidation value.
The loan review should include physical inspection of
collateral and an examination of collateral records,
Credit checks,
Profitability, and
Regulatory compliance.

Loan Review Systems

Automated reporting and actual review.

In automated reporting, banks use a software package which

ensures the automated reporting of new and renewed loans, loans
over certain limit, past due loans, loans by rate level, participation
relation analysis, officers portfolio profile, loans over bank limit.
Banks make these reports available periodically at various places
within the organization. The intent of this review is not only to
monitor individual position of credit but also to detect trends which
may require in-depth analysis and possible management action.
In actual system there are three tier loan review system. In three
tier systems, all loans are classified as first tire, second tire, and
third tire on the basis of loans volume and some other selected
criteria.

Risk Coding/ Loan Grades

Types of loan

Substandard

Doubtful

Bad and loss

Continuous loans

Non payment/ Renewal Classified

as Classified as doubtful
within 3 moths or 6 substandard for 6 to 12 for 12 months or more
months after expiry months
date

Demand loans

Non payment within 3 Classified

as Classified as doubtful
months or 6 months substandard for 6 to 12 for 12 months or more
after expiry date
months.

Fixed term loans

(Up-to five years)

Installment default for Classified

as Classified as doubtful
more than 6 months.
substandard more than more than 18 months
12 months

Fixed term loans (more Installment

default Classified
as Classified as doubtful
than five years)
more than 12 months
substandard more than more than 24 months
18 months
Short- term Agriculture Overdue more than 12 Overdue more than 36 Overdue more than 60
and Micro-Credit
months
months
months

Risk Coding/ Loan Grades

Types
Loan

of Classified

Substandard Doubtful

Bad and Loss

Classified
Classified for
Continuous On the expiry Classified
of due date or more than 6 more than 9 12 months and
Loan
not renewal

Demand
Loan

months
but months
but more
not more than not
over12
9 months
months

On the expiry Classified

of due date or more than 6
not renewal.
months
but
less than 9
months

Classified
Classified
more than 9 more than 12
months
but months
and
less
than12 more
months

Key Ingredients in the Loan

Review System
A good loan policy is a guide line for the credit
officers. A good credit policy, a good administrative
system, accurate information and, of course, a
savvy senior management are key for success in
loan review. Reviews are made on the basis of
information, and the success of review greatly
depends on the accuracy of information. To ensure
its accuracy, information must be tested from an
independent, unbiased perspective. For making
loan review accurate, a separate loan review
department headed by one man with commercial
lending experience and common sense is needed.

Principles of Effective
Loan Review
Avoid the gotcha approach in words and
actions,
Communicate in timely way. Do not spring
surprises, touch base with the involved
parties, and get the full story,
Give
credit
where
credit
is
due;
acknowledge when the line initiates action.
Use the team approach. Ask How can we
fix this? versus How did this get broken?

Principles of Effective
Loan Review
Avoid sharp and prickly adjectives,
Keep materiality in mind: Nice to have versus need
to have; and underwriting oversight on an isolated
basis should not be a cause for a public humiliation;
an issue on a $10,000 loan probably is not an
important issue on a $10 million loan,
Avoid jumping to conclusions, especially when you
have not discussed the issue with all parties involved,
Recognize signals you may be giving; dont start out
with we are right and you are wrong body language
and verbal cues. After all, you may be wrong. Listen
at least as much as you talk,

Principles of Effective
Loan Review
Make sure your constituents know
that you recognize risk grading is as
much art as it may be science and
that you are equally open to
upgrading as downgrading, and
If it does not make sense, it is
probably wrong.

Which System is best?

A loan review system is the best for a bank is
dependent on the risk tolerance and credit
culture of the bank. System which is best suited
in one bank may not be completely applicable to
another bank. In some respect it also takes into
consideration the overall financial condition of
the bank, its size, and its geographic footprint,
the mix of the banks portfolio among consumer
loans, small-business loans. Large commercial
loans may influence the direction and scope of a
loan review process.

Problem loans Identification and

Resolution

Loan losses can be

minimized
by
early
detection of problem
and
its
efficient
handling.

Definition of Problem
Loan
Behrens (1998) defines problem loan
as:
A problem loan can also be defined as
one in which there is a major
breakdown
in
the
repayment
agreement resulting in an undue
delay in collection, or one in which it
appears legal action may required to
effect collection.

Banking Company (Revised) Act 2001

(1) In case of continuous loan or call loan:

On the expiry of due date, (2) Term loan
(Maturity less than 5 Year): On the expiry of
installment due date, (3) Term loan
(Maturity more than 5 years): On the expiry
of 6 month of the installment date, (4)
Agriculture and small loan: On the expiry of
6 month of the due date, and (5) Any
overdue loan should be treated as problem
loans. (BRPD Circular No.10 May 14, 2001)

Early Sign of Problem

loans
(1) Lack of profitability, (2) High/rising leverage, (3)
Low/decreasing liquidity, (4) Low collection of accounts
receivables, (5) Slow turn of inventory, (6) Weak/decreasing
equity, (7) Increase in accounts payable, (8) Loans to officers
and stockholders, (9) Fraudulent of financial information, (10)
Delinquency or other default, (11) Failure to provide information,
(12) Family and marital problems, (13) Rapid business
expansion, (14) Changes in management, (15) Change in
accountants, (16) Declining sales, (17) Change in product mix,
(18) Loss of key employees, (19) Collateral problems, (20)
Large/Rising insider transactions, (21) Changes in accounting
methods or auditors, (22) Re-negotiations of loan covenants,
(23) Cancellation of insurance, (24) Investment in non-related
venture, (25) Judgments and tax liens, (26) Concentrations, and
(27) Changes in customer mix.

Causes of Problem Loans

(1) Not paying attention to written loan

policy, (2) Having no real initiative to
determine the purpose of the loan, (3) Doing
improper credit work, (4) Not understanding
the business being financed, (5) Failing to
address repayment realistically, (6) Relying
too heavily on collateral, (7) Refusing to
admit a problem, (8) Being lax with borrowers
who are past due, (9) Procrastinating, and
(10) Failure in to the renewal/reduction
syndrome.