The Lending Credit Officer/

Credit Officer
The credit officer will be defined to be
any individual working on behalf of a
bank and empowered to decide whether
or not to lend to bank customers at
some
determined
interest
rate
(Rwegasira 1992, 2).

The Credit Officers Decision

Making Process

Mathematical Presentation of the

Credit Officers Decision System

The credit officers decision system can be incisively analyzed by

representing it within a mathematical framework. That system can be
conceptually mapped as a function that relates a set of decision inputs X =
x1 x2 .xn, which includes, inter alia, financial information, to a unique
set of decisions U = u1 u2um, regarding the loan for which some
business customer may have applied. Thus, (u1 u2 u3 um ) = f(x1 x2
x3.xn ), where U is a set of decisions regarding the loan applications
which is based on a set of inputs X according to some decision rule(s) f.
See the following figure:

Mathematical Presentation of the Credit Officers Decision System

Decision Inputs
X

Decision Process
f

Decision Output(s)
U

Each of the sets X and U must contain at least one element, but the
number of decision inputs(n) and the number of decisions(m) need
not be equal ( i.e., m n ). The characteristics and the nature of the
functional rule f, which represents the decision process, will depend
on the bank organizational policies, the training, experience,
perception and the goals of the credit executive in question. The
various inputs are processed according to f. The perceived
relevance of these decision inputs to the decision at hand will
determine whether the decision rule used by the credit officer will
assign a weight different from zero to financial information, a
decision input this study is particularly concern with. The relevance,
role and importance of financial information in the credit officers
lending decisions therefore, are very closely related (Rwegasira
1992, 8-9)

Conceptual framework

Steps in Credit Management

First, one must determine priority sectors he/she is interested to

lend and prohibited sectors he/she is not interested to lend (Credit
policy formulation),
Second, one must determine which borrowers are likely to pay their
debt (Credit investigation and analysis),
Third, one must decide how much credit he/she is prepared to
extend in each borrower (credit approval),
Fourth, he/she must decide what evidence he/she need of
indebtedness (Documentation),
Fifth, after he/she has granted credit, he/she has the problem of
collecting the money when it becomes due. How does he/she keep
track of payments? (Monitoring, review, and loan recovery)

 By analyzing the above steps, the study

identifies the
following steps in credit
management: (i)strategic plan for target credit
markets; (ii) credit policy formulation; (iii) client
request/relationship
marketing;
(iv)
loan
interviewing; (v) credit investigation; (vi) credit
analysis; (vii) preparation of credit analysis
reports/ preparation of proposal; (viii) loan
sanction, loan structuring, loan negotiation; (ix)
loan documentation; (x) loan disbursement; (xi)
loan monitoring/review; (xii) problem loan
identification and resolution and (xiii)
loan
recovery.

Flow Chart of Credit

Management
Strategic Plan for Target Markets
Every bank should develop a strategy by targeting markets where
they are interested to invest in current year and in future. For
formulating this strategy, every bank must have adequate data
about the economy and the prospect of the sectors. By analyzing
these data, bank management can be able to determine which
sectors would be profitable for them and how they would invest in
these particular sectors.

Credit Policy
The primary task of the bank is to collect
deposit and to lend it. To ensure efficiency in
this process a bank must decide what types
of loans they will or will not make, in which
sector they will invest in and where not, what
types of loan they will make and what not, to
whom it will lend and to whom not and what
are the conditions, one has to fulfill to
receive loans.

Components of a Standard
Credit Policy
(1) Corporate mission statement, (2) Analysis of
the present credit portfolio, (3) Broad objectives
of the policy, (4) Preferred area of lending, (5)
Discouraged areas of lending, (6) Strategies to
achieve the above objectives, (7) Exposure
limits, (8) Liquidity gap analysis, (9) Spread
management, (10) Credit expansion policy, (11)
Combating the growing menace of NPAs (12)
Industry wise specialization, and (13) Pricing
strategy.

 In

addition to the above components, credit policy may

contain: (1) Specification of the lending authority given to
each loan officer and loan committee (measuring the
maximum amount and types of loan that each person and
committee can approve and what signatures are required),
(2) Credit granting process, (3) Lines of responsibility in
making assignments and reporting information within the
loan department, (4) Operating procedures for soliciting,
reviewing, evaluating, and making decisions on customer
loan applications, (5) Lines of authority within the bank,
detailing who is responsible for maintaining and reviewing
the banks credit files, and (6) A discussion of the preferred
procedures for detecting, analyzing, and working out
problem loan situations.

Credit initiation/ Client

request/ Relationship
Marketing
Traditionally, borrowers apply to the bank

for
loan. Most banks in Bangladesh follow this
tradition. This tradition has changed. Now in the
most developed countries, commercial banks
have introduced the relationship marketing
which means credit officers are approaching
borrowers for marketing their credit. Most of the
banks in developing countries and also banks in
Bangladesh are now thinking to introduce
relationship marketing

Loan Interviewing
It is an education to watch and
study a man of real stature as
he deals with a top-level
customer.

Goals of loan interview such as

1) There is a unique opportunity to convince customer
that he has chosen the best bank in town which
ultimately enhances the goodwill of the bank.
2) It facilitates the collection of necessary information
to reach a loan decision.
3) It gave an opportunity to build new bank business.
4) Credit interview enables credit officer to obtain
enough data and understanding to ensure that the loan
can be collected.

Credit Investigation
Credit investigation is the process of
acquiring enough information from
different sources to determine the
loan applicants willingness and
capacity to service the proposed loan

Steps in Credit investigation

Kreps et al. (1973) identified the following steps
of credit investigation:
In credit investigation first step is to decide what
questions justify the work of obtaining answers.
Second, the credit officer should determine who
is best suited to handle credit investigation.
Third, what are the probable sources of
information?

Qualifications of a Credit
Investigator
An investigator should include knowledge of accounting.
An investigator should be familiar with financial data.
An investigator should be familiar with credit and financial
terminology.
He/she should also be knowledgeable with the code of ethics
for the exchange of credit information.

An investigator should be fully aware of the legal

ramifications involved in the exchange of commercial credit
information.
An investigator should also be able to contact consulates,
embassies, and trade development offices. (Heinemeyer
1980).

Sources of Information
Information Supplied by the Credit Applicant

(1) Type and amount of loan,

(2) Proposed sources of repayment,
(3) Plan of repayment,
(4) Name of collateral or guarantors,
(5) Names of previous and current creditors,
(6) List of primary customers and trade
suppliers,

Information Supplied by the

Credit Applicant
(7) Firms account,
(8) Principal officers and shareholders,
(9) Personal and business history,
(10) Three or more years financial
statements,
(11) Personal income tax returns,
(12) Borrowing authorities and
(13) Insurance and continuing guarantees.

Lending Officers Query

The lending officer may inquire information relating to
(1) Characteristics of borrowers market, (2) Sales and
distribution channels, (3) Production process, (4)
Labor relation, (5) Experience and educational
background of principal owner or executives, (6)
Name of the person who will take charge in absence
of current Chief Executive Officer (CEO), (7) Firm
strategic planning program, (8) Tentative difference of
present market and future market opportunity, (9)
Comprehensive strength and weakness of the firm,
and (10) Personal liabilities of applicants and
guarantor.

Internal Sources of
Information
(1) Credit file of present or previous borrowers,
(2) Deposit account of present and previous
customers,
(3) Past payment performance,
(4) Principal customer, suppliers and other creditors
(Through account analysis of applicant),
(5) Income from investment and employment,
(6) Income tax returns,
(7) Depreciation and other information from income tax
returns.

External Sources
1) Central bank credit information bureau
(CIB)
2) Commercial publications: (a) Stock
exchange
publications,
(b)
Special
purpose directories, (c) Articles on
published trade publications.

Centralization versus
Decentralized Investigation
Completely Centralized: In a completely
centralized investigation system, one unit
is responsible for all foreign and domestic
account investigations and answering of
references
inquiries
on
customer
accounts. This form is usually adopted by
banks with a limited number of branches
and where lending to major customers is
done from the main office.

Partially centralized
a) Foreign-domestic
b) Accounts-non accounts
c) Centralized with exceptions
3) Completely Decentralized

Centralization versus
Decentralized Investigation
1) Completely Centralized
2) Partially centralized
a) Foreign-domestic
b) Accounts-non accounts
c) Centralized with exceptions
3) Completely Decentralized

Credit Analysis
Shanmugam et al. (1992, ) defined credit
analysis in this way

Credit analysis is the process

whereby both quantifiable and
subjective factors are evaluated
simultaneously and judged.

Role of Financial Information in

Credit Decision Making
Optimal Approach to Lending Credit
officers Financial Analysis (An
integrated analysis

Components of Credit Analysis

Scholarly literature has developed some basic
components of credit analysis which we term as
Cs of credit. Here is a brief description of the
principal Cs of credit:
C: Character, C: Capital C: Capacity C:
Collateral C: Consequences C: CashFlow C:
Condition C: Current information C: Customer
relationship C: Corporate life cycle has been
developed C: Economic Condition.

Character
1) Does he have proven honesty? What is his
past credit history? 2) What is his experience in
this field? 3) What is his expertise in his field? 4)
What are his administrative abilities? Is he an
organizer-planner-can he supervise people? 5)
Intelligence- is he quick to see a problem and
then act to correct? 6) Is he ambitious or lazy?
7) How does he communicate with you as a loan
man? 8) What are his habits and how does he
conduct his personal life?