Factors influencing loan policy in syndicate Bank
The important factors which go into the determination of loan policies of a bank are following.
Capital Position:
Capital position is probably the most important factor influencing loan policies of a bank. As observed earlier capital provides cushion to absorb losses that may occur. It serves as a protective factor against losses for depositors and guarantee fund to creditors. A bank with strong capital position can assure more credit risk than one with weak capital position. Accordingly the former can follows liberal lending policy and provide different types of loan including long-term loans promising higher interest rates which the latter cannot do so because of the greater risk involved.
Earning Requirements:
Profit making is one of the principal objectives of a commercial bank. However, some banks may be in a position to emphasis income, but others may stress on liquidity. These banks who have set income as the principal goal of their lending would follow aggressive policy of lending and might make large amount of term loans or consumer loans which normally are made at higher interest rates because of relatively greater amount of risks, which they accompany. This should not suggest that banker would take under risks for a accomplishing the objective of profitability, where earning receive greater emphasis in loan policy of a bank it may mean that the would keep a larger amount of secondary reserves or it would include in its investment account securities carrying shorter maturity periods and possess relatively less risks.
Deposit Variability:
Banks that have experienced credit movement in their deposits will have to follow conservative lending policy. They cannot afford to incur undue risks by extending term lending facilities. Similar policy should also be followed where banks are faced with declining deposits. In a refreshing contrast with this liberal lending policy can be pursued by banks whose deposits show little or no fluctuations and who can easily predict fluctuations in deposits and loan demands and make provision for them through secondary reserves. Banker whose deposits have shown rising tendency in the past and expect the rising trend to persist in future can also be liberal in their loan policy.
State of
In formulating lending policy for his banks the banker should also keep in mind economic conditions that are prevailing in the region served by the bank. A bank operating in an area which is subject to seasonal and cyclical fluctuations can ill afford to adopt liberal policy because that would entail the bank in hazards of illiquidity. But in stable economy where possibility of fluctuation in levels of deposits and loan demands is limited the banker can follow liberal loan policy. If economic conditions of the country are expected to improve and level of business activity is likely to increase banker can liberalise lending policy by relating credit standards and security requirements to accommodate those borrowers who were either refused banking faculties due to stiff credit policy.
Monetary Policy:
Monetary policy of central banking authorities goes a long way in determining the lending policy of a commercial bank. Through variation in minimum reserve requirement and net liquidity ratio central bank influence, the lending ability of banks. Thus, by reducing the proportion of minimum cash reserve which a commercial bank is required to carry with the central bank and reducing net liquidity ratio and bank would get additional funds which can be utilised in lending form. In the event the cash reserve ratio and net liquidity ratio is increased lending ability of bank is limited.
Ability and Experience of loan Officers:
Loan officers in a bank play a significant role in execution of loan policies of the bank. The board should therefore, consider the skill and competence of the bank loan officers while laying down loan policy. Where a bank is staffed with a larger number of credit officers having expertise knowledge and rich experience in diverse forms of loans the banker can afford to provide different types of lending faculties and formulate the policy accordingly. But this cannot be done by banks whose credit officers are competent to deal with certain types of loans. This is why smaller banks have been found limiting their lending business to short-term loans. Most of those banks have obtained from consumer lending and also term-lending to business enterprises because they were equipped with skilled personnel.
Competitive Position:
In formulating loan policy the management should give consideration to the competitive position of the bank. Where a bank finds that strong competing institutions exist, say in the field of term lending and the management feels that it cannot afford to provide the loans on terms being offered by the other existing institution, it might follow a policy of refraining the bank from entering in the sphere of term-loans.
Credit needs to the Area Served:
Credit needs of the area served by the bank would also influence the loan policy. A bank is supposed to meet Loan demands of all local borrowers who present logical and economically sound loan requests and granting of such requests would not violate the prudent banking. If this cannot be done there will be little justification for an institution to exist in that region. Thus in an economy predominantly dependent on agriculture, the bank must tailor its loan policy to meet the seasonal loan demands of the farmers.
Components of Credit Policy:
The credit policy of bank consist the five major components, which are as follows.
Objectives:
The first step in framing a credit policy in the formulation of objectives of the proposed policy with diverse objectives like profitability, liquidity, volume of business risk factor etc.
Volume of mix loan:
The policy should specify the targeted composition of the loan portfolio such composition being in terms of industry / location / size / interest rate / security.
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