Bank Lending

BANK LENDING (2007

Word count : 1 ,977 (outside references

INTRODUCTION

In the process of extending credit facilities to customers , banks face the risk of either loosing part or all of the loaned money . The risk involve in credit grant to customers constitute a major risk faced by banks . Although , it is argued that in all banking activities there are elements of risks involve , but credit risks surpasses pother risks faced by banks . It thus , requires that banks should stick to a sound strategy for operating its process of credit granting to

customers . According to Basel Committee for Banking Supervision (2000 , Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms . In to avoid an implication of huge risk and the actual lost of lent money to customers it is necessary that sound administration of lending system is put in place by the banking organization . How would the bank ensure that it operates a sound banking credit risk management ? It requires that the guideline and strategy for credit administration is one that is drawn based on adequate evaluation of the credit to be giving out and the understanding of the customer to whom this loan is to be given to . Furthermore , every members of the organization that partake in the process of credit administration are made to follow the sound laid down policy by the organization . The gathering of the right information about the credit risks to be contracted with the bank borrower , including information about their credit worthiness is significant for credit management . In this view Thadden (2001 , argues that , This inside information gives existing lenders an informational advantage over potential competitors at the refinancing stage and reduces ex-post competition . Hence , an initial situation of competition between symmetrically informed lenders turns into one of asymmetric information once one lender has attracted the business and dealt with the customer for some time . Since borrowers and lenders rationally anticipate that the borrower will be `informationally captured ' in the relationship in the future , initial finance is offered at a discount which reflects the expected mark up on future terms of finance . The quality of information gathered by the lending bank on the customer seeking for credit would help it in making its decision whether to approve or reject such credit grant . This will go a long way in preventing the bank from incurring high credit risks

OPERATING UNDER A SOUND CREDIT GRANTING PROCESS

The process for sound credit-risk management should be one that is explicit and understandable to all members of the bank who are directly or indirectly partakers in the process of granting loan . Furthermore there should be in place an assessment process for new investment and credit sort by customers . It is also a good practice that a sound credit-risk management be accompanied with mechanisms for revaluation renewal , and refinancing of existing credits . This process requires that the management of such bank should be...