Loan Administration: Meaning, Structure of Loan Administration
Proper administrative framework and structure are essential for the proper execution of loan activities. It has been mentioned before that loan is one of the important activities of banks.
The more efficiently a bunk can manage loan activities with the proper administrative framework, the higher the recovery rate and the lower will be the problem loans.
In the 80s, over two hundred banks became problem banks yearly in the USA. One of the major reasons for this bank failure, identified by the US Comptroller of Currency Department, is the weak structure of loan administration.
The ways how the Comptroller of Currency department identified the problems are given below;
- Loan activities violating the loan policy
- Loan conditions and standards of loan classification are too much flexible and confusing.
- Policies and activities of loan operations are not commensurate with each other.
- Loan concentration at a dangerous level
- Ineffective control over the loan officers
- Sanctioning loans beyond loanable funds
- Use of ineffective techniques for identifying problem loans
- Wrong assessment of inflow and outflow of cash of the potential borrower, and
- Disbursement of loans outside the command area of the bank/branch
After analyzing the above-mentioned administrative weaknesses, it is clear that: improper and weak loan administrative framework is the main cause of bank failure.
It is important to employ a skilled and efficient workforce and create new sections (if required) to execute loan activities properly. Moreover, a clear job description, responsibility, and accountability for improper actions must be ensured.
The major steps needed to be taken by the board of directors to formulate an administrative structure for effective loan management are given below:
- Formulate and implement a written loan policy.
- To design the loan administrative structure describing clear-cut responsibility and accountability.
- To continuously supervise and review loan cases to identify the problem loans.
- To maintain credit files with a detailed database of each client in which all the recent and past transaction records and the borrowers’ financial information, such as the business or income source of the borrower, loan amortization schedule, and the year-end financial statements, etc., will be compiled.
- To devise strategies and appropriate techniques for identifying problem loans.
- To innovate technical skills to supervise and monitor the problem loans
- To design unique steps to recover loans from specific borrowers
- To design effective ways to recover bad loans
- To improve the structure of loan administration based on the experience of the volume of default loans and the causes thereof.
The above-mentioned structure applies to a mid-level commercial bank. Nationalized banks and large commercial banks maintain regional or district-based administrative frameworks.
However, industrial, commercial, or export-import loans are provided by specialized loan divisions.
The manager is the head of a branch, and there is an officer under him to oversee the loan activities, which is the branch in charge of the loan section.
If the branch is too small, all the employees have to work under the instructions of the manager of the branch to perform different aspects of loan activities.
If the amount applied for a loan is higher than the stipulated amount, the approval is forwarded to the upper-level management for consideration after completing the branch-level analysis.
Steps in Loan Operations and Administration
Generally, loan operations are executed by the nine steps, which are stated below;
- Receiving loan application
- Collecting loan information
- Credit analysis
- Final decision about the loan
- Loan documentation
- Loan agreement
- Recording loan transactions
- Review and monitoring of loan agreement execution
- Collection of loan
The 9 steps mentioned above are to be followed sequentially for a systematic and disciplined loan operation.
Suppose any step is bypassed by showing mercy or nepotism to the borrower or facing political pressure. In that case, complexity will arise, which may create a defaulting situation and consequently put banks to fail.
The rate of discarding the loan application will be greatly reduced if the loan application is made according to the announced loan policy of the bank.
On the other hand, if the relevant information is incomplete and inadequate, failing to collect the rest of the information will be very annoying.
Again, an analysis based on incomplete information may lead the bank to a wrong decision.
Such a wrong decision is very perilous and costly for banks. The loan contract should be finalized only after properly analyzing the borrower’s eligibility in fulfilling the loan contract terms and the documents provided for the collateralized assets.