When formulating a loan policy in a bank, there are factors that have to be considered to reduce lending risks and ensure that the product will perform well in the market. There are different things that are addressed in the process including the need for the loan, risks involved, pricing, collateral, necessary financial details and monitoring of approved financing.
What factors are considered when formulating a loan policy?
The capital being held by a bank provides protective cushioning to ensure that the bank’s operations are not affected by any losses incurred. This means that clients are able to conveniently access their deposits even when there are loans that are yet to be cleared. An institution with a rigid capital backing can afford to take more risks by developing a flexible policy with more accommodating features.
- Variations in deposits
Banking institutions have to observe the trend followed by consumers when depositing and making withdrawals or transfers. Conservative measures are then put in place where there are huge fluctuations in available deposits to reduce the effects of any possible risks that are likely to occur. The same scenario is also likely to play out where a bank is experiencing a decline in available savings.
- Economic status
The prevailing economic conditions will also influence policy formulation and a bank located in a stable environment is likely to introduce a very flexible product. If there are projections of political instability in the future, the formulators can play safe by introducing the need to pledge collateral and reducing credit period. These are measures that will help to protect any financing extended to consumers.
- Competence of credit officers
The board involved in the formulation should factor in experience of the credit officers that are currently working with the bank. In some cases, such officers are only experienced in dealing with some specific loans and their performance can be affected when dealing with other products. A bank with highly experienced loan officers can comfortably introduce a loan policy that will accommodate different needs of consumers.
- Existing competition
The number of available banking institutions has been rising considerably and the situation has created huge competition for the available lending market. Smaller or newer banks are likely to formulate a loan policy that focuses on market areas that are yet to be tapped into by the bigger and well established institutions. Bigger banks are also likely to lower their standards to capture a wider market.
- Consumer needs
Just like with any other business, banks also have to carry out market analysis to determine the needs of consumers. This then helps to develop products that are tailored to match the identified needs. The needs of consumers therefore have to be considered when formulating a loan policy. Market analysis also helps to determine affordability and plays a vital role in determining the requirements on various products.
Making changes to the policy
After formulating a policy and implementing it, the board may realize that there are some shortcomings that may be affecting performance of certain loan products. These are issues that can be adjusted by making changes to the existing loan policy. There are also other cases that may necessitate such adjustments including:
- Existence of multiple underwritings
- Change of directors or officers listed in the policy
- Omission or change of identified trade areas
- Discontinuation or introduction of products
- Introduction of new regulations
Generally, loan policy formulation is an involving process with numerous variables that need to be factored in. This is also critical since making the wrong decisions can easily affect the bank’s performance.