30/09/2018
Background
How does bank process our Loan Application?
Many times my clients ask me this question.
When we submit our Projections, that is estimates of future period along with the Financial documents of yesteryear's, what relevance it has to the Credit Officer of the bank.
On what grounds bank managers decide to give us loans?
What are the methods of analysing information given by us ?
Yes, it is necessary to know how does the bank analyse our papers, what are the parameters of lending etc. Before we decide to borrow.
a. Let me take you in the history. Earlier, that is before banking sector was thrown open to Private sector, entire banking industry was under the control of Central government. In those days, sources and quality of information was also very limited and not perfectly reliable too.
During those days Loan applications were processed purely on the basis of Projections given by the borrower. It is also important to understand that the credit policy of those days was known as “need based “ credit, that is need of the borrower was at the central of the problem.
However with private sector entering in the banking industry, credit decisions, ( decision to give the loan or not) was “need of the bank”.
Major shift in the approach of sanctioning the loan was shifted from “ Projections for future” to “facts in the history” or Information available.
You will find improvement of quality of information during last 20 years goes parallel with growth of Private sector banking.
Credit decisions in Private sector banking are mainly “Information based” rather than subjective assessment of Projections. Critical Risk analysis of the account is also an added aspect in processing of loan application.
What consists of this information :
1. Credit History
2. KYC
3. Past performance
4. Market trends in the industry and so on
Now let us see how our loan application flows in the banks
First of all the banks gather the credit score of the borrower, atleast from two credit information companies
If the credit score is satisfactory, other papers are studied. If the credit score is not upto the minimum required number, banks generally rejects the application forthwith.
If satisfied with the Credit score, three people come in the picture
1. Financial Appraisal
2. Legal appraisal
3. Valuation of Security
Except the financial appraisal other two aspects are outsourced by the banks. Legal appraisal is done by the Lawyers on the panel of the branch, simultaneously Banks ask the approved valuers on their panel to inspect the security physically and submit its Fair Valuation.
Major role of the Bank’s officer is for appraisal of financial documents.
Here the Income tax papers of the borrower, his assets and liability statement and past performance is studied. Past performance of the borrower unit, ratio analysis of his total assets and total liabilities are studied.
Loan officer recommends the loan to Credit Rating Officer if he is satisfied with the overall health of the applicant.
Risk rating officer has very critical work to do. Once the loan is given the borrower becomes the “Asset” of the bank which will generate revenue to the bank. Here the Risk rating officer evaluates the probability that the basic money, Principle loan given to you will come back to bank as per the repayment schedule.
It is important to understand what factors are considered by the bank in assessing the Risk in taking the decision of parting with its funds to you.
A. Financial Factors
a. Repayment capacity of the borrower
b. Successful implementation of the project
c. Profitability of the project
d. Assets backing of the borrower
e. Additional sources of income to the borrower
f. Unpaid tax amounts / appeals filed by the borrower
B. Conduct of Account
a. Length of relationship with the bank
b. Previous track record
c. Level of compliances
d. Audit objections raised by the auditors of the banks
e. Value to the bank
f. Integrity with the bank
C. Non financial factors
a. How long the borrower is in this business,
b. Composition of the market
c. Competitors to the borrower
d. Length of relations of the borrower with his customers
e. Technical stability
f. Succession Plan
g. Expertise of the borrower in his business
Most of the banks have Structured Mark sheets for this type of credit rating. Depending on the marks obtained, the account is classified as
a. Very Safe
b. Safe
c. Normal risk
d. Moderate Risk
e. Under Caution
f. High risk
Higher the category or risk, higher will be the rate of interest charged to the loan account.
This is not a standard procedure, but is normally adopted by the banks. For a business owner it is necessary to understand this procedure well before he prepares to approach the bank. By understanding this process, it will be easier for him to prepare for the questions those would be raised by the Loan officer of the bank and the delay in getting loan will be reduced. Faster he gets the loan quicker he will establish in his business.
