Common Steps of Bank Loan Policy

Common Steps of Bank Loan Policy

Bank Loan is the extension of money from a bank to another party with the agreement that the money will be repaid. The loan policy should evidently communicate the considered goals and objectives of the bank, as well as define the types of loan exposures suitable to the institution, loan approval authority, loan limits, loan underwriting criteria, and several other guidelines.

Steps of Bank Loan Policy: As bank loan policy is an important policy for the bank so; the bank loan policy is a process which has been by the bank step by step. This steps has been shown below:

(A) Responsibility of Preparing Loan Policy: Loan is the special aspect of the important policies taken by a bank. Board of directors has ultimate power and responsibility in this regard. Before that loan officers prepare a draft loan policy, make necessary modification through several workshops and then submit it to the loan committee which is formed by the members of the board of directors. Loan committee restructures the loan policy in several meetings & submits it to the board of directors for approval. After necessary modifications and improvements, the loan policy gets the final approval from the board of directors.

(B) Written or Unwritten Loin Policy: Both written and unwritten loan policies are in different banks. Although written loan policy is preferable the unwritten one, because the written loan policy can overcome the situation arisen in the absence of experienced bank officers or in case of misunderstanding among the newly assigned loan officers. Written loan policy can be updated on the basis of experiences & the need of the hour.

(c) Whether Loan Policy should be Rigid or Flexible: Loan policy can be rigid or flexible. Flexible loan policy has some benefits as well as some problems. But as per the opinion of expert bankers and banking specialists, flexible loan policy has more benefits than problems. But as per the opinion of expert bankers and banking specialists, flexible loan policy becomes popular due to its liberal stands for adjustment in case of changed situation and other unavoidable future contingencies.

(d) Elements of Successful Loan Policy: Loan policy provides proper directions & guidelines to the officer’s in-charge of loan management; it helps the bankers to handle loan operations smoothly & effectively. The bankers find it quite easier to make credit decision when the policy covers all the areas of managing loan eases.

There are two types of elements to be considered in framing an effective loan policy –

  • General elements,
  • Policy-procedure related element.