Loan review has got
significant importance especially in this age of turbulent economics. It has
therefore become imperative for institutions to remain in know of the potential
risks of their portfolio. In order to do so, it is very important to detect as
early as possible expected troubles through regular and recurring evaluations
of asset quality, internal controls, and administrative procedures.
Importance
of loan review
It was in late 2006, that
the FFIEC issued a revised Interagency Policy Statement on the Allowance for
Loan and Lease Losses. The policy states that it is "essential that
institutions maintain effective loan review systems". This has been
emphasized because of the important role played by the critical risk ratings
and portfolio assessment in management's assessment of reserve adequacy.
Professional
loan reviewers
In tune with these
strict guidelines, there are many professional agencies that provide thorough
and extensive loan reviews. They employ many techniques to conduct this review
including ALLL methodology and validation. Mostly, they also house seasoned
professionals who are actively associated with money market, regional banks,
community banks, and commercial finance companies and hold senior or executive
level management experience.
Process
for loan review
Typically, the
programs take about a year along with 75% of the client's average outstanding
loans and letters of credit. Now-a-days, the programs have become software
assisted and hence customized.
The reviews are
divided into specific intervals and during each visit data and remarks of the
previously classified and criticized loans are updated. Having done that,
professionals review newly criticized or classified loans, delinquencies,
non-accruals, restructured transactions, new and renewed commitments since the
prior review visit, and when and if relevant, other borrower related credit
exposures.
The adequacy of the
allowance for loan and lease losses is also tested. The process also involves
documenting the organization’s lending policies, procedures and overall lending
process.
In order to make each
visit the most fruitful, the agency informs the client before the actual
on-site visit. It gives the client time to be prepared with all the necessary
documents and materials. This then helps expedite the entire process of review
in an effective and meaningful way. The review normally starts with the
criticized and classified loans, leading to other delinquent and non-accrual
accounts and finally ending up with the scrutiny of other accounts that may
satisfy the requirements of the engagement.
Communication
The crucial part of
any thorough loan review is the effective communication. Having assessed the
credit files, internal loan reports and loan documents, it is very necessary
that the outcome is communicated to the client in a very precise and clear
manner. This requires thorough discussions in meetings. The professionals take
every extra care that discussions are enriching, precise and absolutely worth
holding for the benefits of the client.
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