What do banks consider when processing loans?

A teller counts bank notes at a local bank. / File.

Capital is one of the core things that any business must have in order to smoothly run its operations.

However, a common obstacle for start-ups is lack of capital.

 

This, according to various reports has been made worse due to the ongoing coronavirus pandemic that has halted businesses.

 

In response, businesses turning to banks and other financial institutions for funding.

 

Nonetheless, getting a loan is significantly easier than it was before but is still characterized by hesitance to lend to small businesses.

In this regard, the Doing Business breaks down the six steps of a bank during loan processing with an aim to improve clients’ chances of getting a loan approval.

According to Isimbi Yvette, Legal Officer at Access Bank, Bank lending policy refers to the policy and guidelines adopted by a bank to make its lending process systematic and methodical.

Isimbi also explained that there are two types of loans which include, secured and unsecured loans.

“Unsecured loans are those where you don’t give a security (mortgage/collateral: house, land, vehicles, machinery,..) And instead you pledge your loan to be paid off by your salary/ emoluments/allowances or business proceeds while a secured loan is basically the exact opposite. This is where you give a mortgage or another physical pledge to back up your loan and covers bigger loans compared to the unsecured one,” she said.

Finding prospective loan customers

Most loans to individuals arise from a direct request from a customer who approaches a member of the lender’s staff and asks to fill out a loan application.

In contrast, business loan requests often arise from contacts the loan officers and sales representatives make as they solicit new accounts form firms operating in the lender’s market area.

Evaluating creditworthiness

Upon a customer’s loan request, an interview with a loan officer usually follows, allowing the customer to explain his/her credit needs.

For the most part, the customer is also given the terms and conditions for the loan requested.

Making site visits and evaluating a prospective customer’s credit record

In this case, a loan officer often makes a site visit to assess the customer’s location and the condition of the property and to ask clarifying questions.

According to Isimbi, the loan officer may also contact other creditors who have previously loaned money to this customer to see what their experience has been.

Evaluating a prospective customer’s financial condition

If all is favourable so far, the customer is asked to submit several supporting documents the lender needs to fully evaluate to be able to approve the loan.

The documents include complete financial statements. This aims at determining whether the customer has sufficient cash flow and backup assets to repay the loan.

Assessing possible loan collateral and signing the loan agreement

If the loan committee approves the customer’s request, the loan officer will usually check on the property or other assets to be pledged as collateral to ensure that the lending institution has immediate access to the collateral or can acquire title to the property involved if the loan agreement has defaulted.

Formerly, if the officer and the loan committee are satisfied that both the loan and the proposed collateral are sound, the loan is approved.

Observing compliance and other services needed

The new agreement must be monitored continuously to ensure that the terms of the loan are being followed and that all required payments of principal and interest are being made as promised.

For larger commercial credits (mostly secured), the loan officer will visit the customer’s business periodically to check on the firm’s progress and see what other services the customer may need.

Usually, the loan officer or other staff members enter information about a new loan customer in a computer file known as a customer profile.

eashimwe@newtimesrwanda.com

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