CHAPTER 3:

LENDING POLICIES AND PROCEDURES

Prepared by: Banking department

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 Chapter Outline

1 • Types of Loans Banks

2 • Factors Affecting the Mix of Loans Made

3 • Regulation of Lending

4 • Creating a Written Loan Policy

5 • Steps in the Lending Process

6 • Loan Review and Loan Workouts

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 Lending policy

• Is a fundamental part of the credit process

whereby the lending guidelines that bank
employees follow to conduct lending business
are formalized.

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 Principles of lending policy

• Ensure that advances are safe and money lent out will
Safety come back

• Ensure that money lent out is not locked up for long

Liquidity time by designing the loan maturity period
appropriately

Profitability • Earn adequate profit on its investment

Risk • lend to a diversified customer base

diversification
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 Type of loans

Financial
Agriculture
Institution
Loans
Loans

Real Estate Consumer

Loans Loans
Bank
Loans
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 Type of loans

Lease
financing
receivable
Commercial
Security
and industrial
loans
loans

Bank
Loans
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 Real Estate Loans

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 Agricultural Loans

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 Consumer Loans

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 Lease financing receivable

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 Commercial and industrial loans

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 U.S. banks as of June 30, 2005

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 Factors Determining the Growth and Mix of
Loans
Type of
lending Expected yield
institutions

Lender size Regulation

Characteristics
of the market
Mix Of Experience
and expertise
of
area
Loan management

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 Bank’s asset-quality rating

1 • Strong performance

2 • Satisfactory performance

3 • Fair performance

4 • Marginal performance

5 • Unsatisfactory performance
The better a bank’s asset-quality rating, the less frequently
it will be subject to examination by banking agencies
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 Regulation of Lending (continued)

• Examiners generally look at all loans above a

designated minimum size and at a random
sample of small loans
– Criticized loans: Loans that are performing well but
have minor weaknesses because the lender has not
followed its own loan policy or has failed to get full
documentation from the borrower
– Scheduled loans: Loans that appear to contain
significant weaknesses or that represent what the
examiner regards as a dangerous concentration of
credit in one borrower or in one industry

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 Adversely classified loans

where the loans’ margin of protection is inadequate

- The borrower’s repayment abilities
- Weaknesses in collateral

Doubtful loan
• Strong probability of an uncollectible loss

Loan loss
• Uncollectible
• Not suitable to be called bankable assets

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 Loan Classfications in Vietnam
(Article 10, circular No. 02/2013/TT-NHNN)

Group 1
Group 2
Group 3
Group 4
Group 5
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 Vietcombank – Financial report

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 Quick quizz

1. The principal economic function of banks is

to:
A) Take deposits
B) Make loans
C) Sell financial services
D) Encourage spending

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 Quick quiz (Cont.)

2. According to the textbook the largest category

(by dollar volume) of loans extended by U.S.
banks is:
A) Real estate loans
B) Financial institutions
C) Agricultural loans
D) Commercial and industrial loans

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 Quick quiz (Cont.)

3. Banks that emphasize lending to commercial

customers are labeled:
A. Wholesale banks
B. Retail banks
C. Personal banks
D. Nonbank banks

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 Quick quiz (Cont.)

4. A loan to a local business to purchase a new

machine would be categorized as:
A) A consumer loan
B) An agriculture loan
C) A commercial and industrial loan
D) A real estate loan

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 Quick quiz (Cont.)

5.A loan that appears to examiners to contain

significant weaknesses or that represent a
dangerous concentration of credit in one
borrower or industry are called:
A) Criticized loans
B) Scheduled loans
C) Substandard loans
D) Doubtful loans
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 CAMELS ratings

 Developed in US
 To analyze bank risk
 Helps to evaluate banks with complete
coverage of factors affecting banks
creditworthiness
 Is now industry standard
 Rating 1,2, 3 is less riskier than rating 4,5
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 CAMELS

Capital adequacy (An toàn vốn)

Asset quality (Chất lượng tài sản)
Management quality (năng lực quản lý)
Earnings record (Khả năng sinh lời)
Liquidity position (Mức độ thanh khoản)
Sensitivity to market risk (Rủi ro thị trường)
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 A written loan policy
(Chính sách cho vay)

• Banks can make sure its

loans meet regulatory
standards and are profitable.
• Gives guidelines in making
decisions
• For example: Credit
procedure for consumer
loans, BIDV 2008
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 Twelve Elements of a Good Loan Policy

• A goal statement for the loan portfolios

1
• Specification of the lending authority given to
2 each loan officer and loan committee
• Lines of responsibility in making assignments
3 and reporting information
• Operating procedures for on customer
3 applications

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 Twelve Elements of a Good Loan Policy
• The required documentation that is to accompany
each loan application and what must be kept in the
5 lender’s files

• Lines of authority detailing who is responsible for

6 maintaining and reviewing the institution’s credit files

• Guidelines for taking, evaluating, and perfecting loan

7 collateral

• Procedures for setting loan rates and fees and the

8 terms for repayment of loans

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 Twelve Elements of a Good Loan Policy

• A statement of quality standards applicable to all loans

9

• A statement of the preferred upper limit for total loans

10 outstanding

• A description of the lending institution’s principal trade

11 area, from which most loans should come

• Procedures for detecting and working out problem loan

12 situations

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 Steps in the lending process
1 • Finding prospective loan customers

2 • Evaluating customers’ characters

3 • Making site visits and evaluating customers

4 • Evaluate Customers’ financial condition

5 • Assessing possible Loan Collateral

6 • Signing loan agreement

7 • Monitor compliance with Loan agreement

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 Overview of Loan Procedure

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 Credit Analysis:
What makes a good loan?

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 Q1. Is the borrower creditworthy?

Character
(Thái độ) Capacity
Control (Năng lực)
(Kiểm soát-
law)

6C Cash
(Dòng tiền)

Conditions
Collateral
(Các đk
khác) (TS ĐB)

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 Group Activity: Matching Game
• Sacombank discovers there is already a lien against the
Collaterals 1 fixed assets of one of its customers asking for a loan

• FPT Corporation has asked for a type of loan its lender

Cash 2 normally refuses to make

• Mr. Tuan has an excellent credit rating

Control 3

• Vietjet has achieved higher earnings each year for the

3 past six years
Capacity
• BIDV’s auto loan officer asks a prospective customer, Ms.
3 Anh, for her driver’s license
Character

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 Self-test 1

Q1. Can the loan agreement be properly

structured to protect the lender and the public’s
funds?

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 Self-test 1 (Answer)

Customer depositors

Stockholders

Loan officer
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 Self-test 2

Q2 Can the lender perfect its claim against the

borrowers’ earnings and any assets that may be
pledged as collateral?

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 Self-test 2 Answer

• Reasons for taking collateral:

> If the borrower can not pay, the pledge of
collateral gives the lender the right to cover what
the borrower did not pay back.
> Give the lender a psychological advantage
over the borrower .
>>> Perfect claim

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 Types of loan collateral

• Accounts receivable (khoản phải thu)

• Factoring (bao thanh toán)
• Inventory (Hàng tồn kho)
• Real property (Tài sản thực)
• Personal property (Tài sản cá nhân)
• Personal guarantees (Bảo lãnh cá nhân)

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 Types of loan collaterals

Inventory
Real property
(Hàng tồn
(Tài sản thực)
kho)

Factoring Personal
(bao thanh property (Tài
toán) sản cá nhân)

Accounts Personal
receivable guarantees
(khoản phải Collaterals (Bảo lãnh cá
thu) nhân)

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 Self-test

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Sources of Information about Loan customers

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 Parts of typical loan agreement
• Signed by the borrower, specifies the principal amount
The Note of the loan

Loan commitment
Agreement

Collateral

• Possitive covenants
Covenants • Restrictive covenants

Borrower Guarantie

Events of Default • Specify what actions or inactions in the event of default

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 LOAN REVIEW

The examination of outstanding loans (dư

nợ) to make sure borrowers are adhering
(tuân thủ) to the credit agreements and the
bank is following its own loan policies

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 LOAN REVIEW PROCEDURES

1. Carrying out a review of all types of loans on

a periodic basis.
2. Structuring the loan process
3. Reviewing largest loans most frequently
4. Conducting more frequent reviews of
troubled loans
5. Accelerating the loan review schedule if
economy or industry experiences problems
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 WARNING SIGNS OF PROBLEM LOANS

1. Unusual or unexpected delays in receiving financial

statements.
2. Any sudden changes in accounting methods.
3. Restructuring debt or eliminating dividend payments
or changes in credit rating.
4. Adverse changes in the price of stock.
5. Losses in one or more years.
6. Adverse changes in capital structure.
7. Deviations in actual sales from predictions.
8. Unexpected and unexplained changes in deposits
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 Loan Workout

The process of resolving a troubled loan so the

bank can recover its funds.

(Read Textbook, page 534)

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 IN VIETNAM

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