Importance Of Credit Management In Banks | Credit Analysis | Bank Lending
An important stage in any bank credit relationship is the point of first drawdown or first disbursement. Before drawdown, the lender calls for basic documents to ascertain the identity of the borrower, his character, whether or not he has the capacity to repay from operations of business or whatever other source agreed upon and also for the purposes of perfecting the security
In understanding the importance of credit management in banks there is an individual who is in charge and this largely determines the rate of progress in the evolving relationship. This is appoint where sound bank credit management becomes necessary since the borrower takes over control immediately after the cash has been disbursed to the borrower.
From then, the customer will reduce his visit to the bank, but the bank will now be the visiting party. The bank has the responsibility of setting up a system to mitigate the likelihood of the extreme consequence that might arise from the loss of control.
The importance of credit management in banks or administration should therefore, be appreciated as a system put in place to ensure that the carrying risks of loans and advances do not risk beyond the booking risks.
Booking Risks – this can be defined as the level or degree of uncertainty repayments that management had found acceptable and are therefore prepared to bear relative to the expected income rate level does not rise higher than the booking or intended risk level.
Certain legal, administrative and financial provisions are made in the offer letter. If in line with the spirit of the offer and all the provisions adequately observed, loans and advances will only go bad in rare and extreme cases.
In knowing the importance of credit management in banks, it is the duty of the credit administrator to see that the parties involved observe all the terms and conditions of the loan relationship.
If a bank losses control, it then means that it has done all that is within it’s power to ensure that the money is repaid. To ensure efficient and effective repayment, the customer has to be policed.
Importance Of Credit Management In Banks
It is important to note that in modern banking system, a relationship manager must be appointed for each facility granted so as to monitor the borrower.
The essence of this is to make sure that the money is not diverted from the proposed project. Financial management in banks is important because public fund loaned out has to be recovered in order for the bank to stay in business.
Credit Analysis Tools In Bank Credit Management
There are too many tools used by banks that enable them to create good credits. These tools includes the start up review, Financial analysis and Non financial analysis;
- Preliminary review – This involves assessments of the deal to determine it’s purpose, conformity to constraints like bank policy law and regulations, and relationship with customers.
- Financial analysis includes analysis of historical financial statements and forecast.
- Non financial analysis may include the business and management risks and industrial assessment.
Definition Of Bank Credit Management
Understanding the importance of credit management in banks refers to the process of extending credit, terms included in the loan agreement and the method of loan recovering implored by the bank as at when due. It is the responsibility of the bank to control it’s credit policies which will help in improving the banks revenues as well as reducing any type of financial risks.