LENDING AND CREDIT ADMINISTRATION

1.0 INTRODUCTION

You would recall that, in the preceding study unit, the reasons for effective management of bank lending and credits are identified and discussed. The fundamental purpose for managing the funds under loans and advances effectively is informed by the fact that lending of funds to bank customers involves the use of the depositors’ money. Therefore, the necessary modalities must be instituted to ensure that recoveries of funds under loans and advances are managed in order to protect the interest of the depositors. This is imperative towards ensuring that the profitable operations and survival of the banks are not in jeopardy. Therefore, this study unit is used to identify and discuss the necessary steps involved in effective management of lending and credits being granted to the customers.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1. discuss lending and credit administration 
2. mention and explain modalities for lending and credit administration 

3.0 MAIN CONTENT

3.1 LENDING AND CREDIT ADMINISTRATION

Essentially, the back business of commercial banks revolves around financial intermediation activities. Therefore, they source for funds from the members of the public, corporate organizations and other institutions through various forms of deposit accounts. Such funds are then used for the purpose of lending and credit facilities. The depositors are entitled to the funds whenever they so desired. The banks are invariably under legal obligations to honour the demands of the depositors. The banks therefore, are constantly under obligation to evolve ways of maintaining delicate
balance between the recoveries of funds loaned out and the demands of the depositors. This is where the issue of lending and credit administration comes into play. In essence, the funds which are loaned out to customers have to be managed in such a manner that such funds can be available from the customers whenever they are needed to meet the demand of the depositors. The delicate balancing of demands for funds by depositors and recoveries of loans and advances from customers is predicted on the necessity for the commercial banks to survive in business and generate reasonable returns for the shareholders. It implies that lending and credits should be managed in such a way that generating funds from loan repayments is tailored towards meeting periodic demands of the depositors.

In order to manage loans and credits effectively for adequately meeting the demands on the deposit accounts of customers, there are operational modalities normally put in place by the banks for administering loans and advances right from inception to the time when they totally liquidated. Such modalities of managing loans and advances are identified and discussed below.

3.2 MODALITIES FOR LENDING & CREDIT ADMINISTRATION

1.  Loan Budget and Composition It is an ideal practice for commercial banks to determine the amount of funds which will be devoted for loans and advances in a given period of time taking into consideration the requirements of the regulatory agency. Hence the banks determines total amount of loans and advances for a particular period, maximum amount for a single case, and average amount of lending to be made per case. In terms of composition of loans and advances that will be granted to customers, the banks consider issues such as types of loan and advances, sectors, sub-sectors and industry mix, investment or equity participation, and productivity sector favoured by the government.
2. Loan Committee and Authorisation It is also a common practice for commercial banks to institute a loan and advances committee to deal with major credit decisions. There are some responsibilities which the loan committee is expected to perform. Such responsibilities or duties of the loan committee may, among others, include the following: a.To review major new loans; b.Review major loan renewals; c.Ascertain the reasons for renewal; d.Assess delinquent loans & determine the cause of delinquency; e.Ensure compliance with established lending policy; f.Ensure full documentation of loans before disbursement; and g.Ensure consistency in the treatment of loan customers. 

The responsibilities of a loan committee as stated above may not be exhaustive and therefore, individual bank may include other duties for the committee to discharge.

SELF ASSESSMENT EXERCISE 1

Mention the responsibilities of a loan committee of the commercial bank?

3. Periodicity and Loan Grading System

In terms of periodicity, the duration of loan composition is very critical. Therefore, the basic considerations are call loans, short-term working capital loan, intermediate-term
investment loan, and long-term investment loan. A typical grading system for loans and advances is as presented below, which indicates classification of loans in terms of their likely performance.