The lending process involves a series of activities that lead to the approval or rejection of a bank loan application. The loan department of a bank employs different credit professionals with unique roles and responsibilities that complement each other to make the lending process complete.
Loans are one of the primary sources of income for financial institutions. Banks make money by charging a higher interest rate than what they pay to depositors. The amount of interest charged on loan depends on the amount of loan, loan duration, credit score, assessed level of risk, among other factors. Due to how important the lending process is, banks allocate a lot of resources to the credit department so that they can lend to creditworthy borrowers. As a result, they are able to protect themselves from the losses resulting from customer defaults.
Credit lending is a lengthy process that involves different credit professionals from the information collection stage to the approval and subsequent disbursement of funds.
The main credit professionals involved in credit analysis include credit analysts, underwriters, and senior credit officers.
Every financial institution follows to its own procedures regarding credit review, which is guided by laws of the financial statutes.
How the Lending Process Works
Banks offer different types of loans, ranging from individual loans to corporate loans. Loan officers in the bank analyze loan applications on an individual level. Bank credit can be started by a loan officer working at the bank or by potential borrowers who approach the bank for financing.
Loan officers are responsible for securing business for the bank and developing relationships with clients on behalf of the bank. They can approach individuals and business owners with offers for loans. Potential customers can choose to accept, reject, or defer the loan offer to a later time in the future.
Customers can also approach the bank for credit to finance the acquisition of an asset, working capital, or other revenue-generating projects. In both loan approaches, credit officers in the department must conduct background checks on the potential borrowers by looking at their credit payment history, the viability of the project to be funded, adequacy of the credit to fund the project, past transactions with the bank and other financial institutions, etc.
The goal is to assess the creditworthiness of the customer and their ability to use the credit, if extended, to generate sufficient cash flows to meet the costs of the loan and operating expenses of the business.
Credit Professionals Who Evaluate Bank Loans
An underwriter is a loan officer who evaluates a loan application to determine whether it is viable for the bank. The underwriter assesses the financial history of a client to check whether they are a risk worth taking. The risk level is determined using the past interaction of the client with the bank or other financial institutions.
The underwriter evaluates the ability of the client to repay the requested loan based on their financial ability and cash flows. The loan’s intended purpose is also queried to establish whether it is viable and if the borrower is able to generate sufficient cash flows. The underwriter reviews the client’s credit history, collateral, and capacity.
The client should be able to prove that they have enough capacity to clear their current loans, if any, and repay the applied credit in entirety without any trouble. The underwriter is required to verify the past payment record of the potential borrower by requesting a credit report from a reputable credit rating agency. The report provides information on the client’s credit status, past loans and credit cards and their repayment history, history of defaults, foreclosure and repossessions, employment, etc.
All the information above helps the underwriter determine the risk level of the client and if it is a risk worth taking. The underwriter also evaluates the collateral for the loan and how its appraised value compares to the value of the loan applied. The ownership of the collateral should be ascertained, and ownership documents deposited with the bank.
2. Credit Analyst
Credit analysts are an integral part of the loan department of a bank or other financial institution. They are in charge of the credit analysis process, which is considered in isolation for every borrower. A credit analyst may be assigned to a specific borrower. Their role is to verify that the submitted documents are accurate. They are also tasked with checking if the client’s business or purpose to be funded has the financial ability to generate adequate cash flows to service the debt and provide the borrower with an income.
The credit analysis may be required to conduct a site visit to the client’s business premises as part of the loan evaluation process. The main purpose of a site visit is to verify that the information provided in the loan application form is accurate and that the purpose of the loan is viable.
The credit analyst also verifies the ownership of the collateral and confirms that the assessed value of the collateral is accurate. The verification is done by either commissioning an appraisal or comparing the value of the asset to the value of the same asset in other companies or with industry standards.
Other factors that the analyst considers are the capacity of the borrower to repay the loan in its entirety, owner’s capital contribution in the business, and condition of the business environment in which the client’s business is domiciled. The credit analyst also considers the credit score of the borrower to determine the level of credit risk associated with lending to them.
Depending on his/her findings on the creditworthiness of the borrower, the credit analyst makes a recommendation to the credit committee on whether or not to approve the loan, and if approved, the amount of credit to be extended and the terms of the loan.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: