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Whether for the purpose of approval or for after-the-fact review, most banks have credit committees. Whatever its purpose, the credit committee serves as a forum for the bank's senior lenders to interpret lending policy, educate their junior lenders, and thereby shape the bank's credit culture.
As credit quality issues have come to the forefront in recent years, many banks have reevaluated and altered their committee/review processes. Others are reexamining their processes now and are likely to make changes. The format in which credit committees review loans should be a part of the reevaluation exercises.
It is not surprising that the format of credit committee write-ups varies widely from bank to bank. They are usually the cumulative result of informational needs and priorities as perceived by the bank's credit administrators. Sometimes the format outlives those who originally created it, and the bank needs to ask whether that format is serving its intended purposes. If it is not, would standardizing it to create a consistent format help ensure that the credit committee can meet its objectives?
Although standardization has worked well at my bank, my purpose is not necessarily to advocate standardizing but to stimulate thought as this issue is examined at other banks.
Inherent in all credits are subjective and objective factors, both of which bear on the borrower's creditworthiness. Subjective factors include issues such as:
* The reputation, integrity, and competence of the borrower.
* The relative risk associated with the borrower's industry.
* An evaluation of the borrower's past relationship with the bank.
These are factors that need to be addressed both in the approval process and in the annual review process and that require a detailed write-up by the loan officer. The subjective part of the write-up defies much standardization except for the points that should (or must) be covered. The results depend on the writing skills of the loan officer.
Objective elements of the credit are a different matter, however, and it is not difficult to compile a list of them. Several examples will help define the nature of these elements.
* Exact payment terms - interest payment …