Introducing committee-based lending process
Board of Directors (BOD) is the supreme authority of a bank and it has a key role in keeping the health of loan portfolio in good shape. So BOD, among other things, must perform the following:
n BOD will develop the loan approving guidelines which will contain specific criteria based on which approving/declining decision will be taken by the committee.
n BOD in its meeting will receive and review the reports of loans either approved or declined during the preceding period.
n BOD will also take into consideration the Audit Committee's finding on the report and act accordingly.
n BOD will review exceptional loan proposals referred by the committee and if found satisfactory, will approve the same with some policy decisions as and when deemed necessary.
n BOD will periodically review and update loan approving guidelines.
BOD'S AUTHORITY SHOULD NOT BE CURTAILED BUT STRENGTHENED: Some people may argue that when committee-based lending process is introduced, BOD's authority may be curtailed. This is not correct. On the contrary, more stringent control can be put in place with this measure whereupon the BOD will be able to evade unnecessary blame for approving bad loan. In addition, BOD will be able to hold committee members responsible and accountable for any violation of and deviation from set guidelines and can take action accordingly. Even by doing so, corporate governance can also be improved considerably.
LOAN APPROVING GUIDELINES: A loan approving guideline is a very extensive and detailed document which should be developed consistent with the bank's business policy, BOD's mandate, vision, mission, bank's credit manual, central bank's policy, target customer group, bank's risk appetite and government policy. However the following parameters among others may be included in the guideline.
I. Borrower's internal and external grading.
II. Borrower's business size, volume and turnover.
III. Borrower's capital base and leverage ratio.
IV. Borrower's past track record of utilizing loans.
V. Borrower's past repayment history.
VI. Borrower's profitability.
VII. Single borrower Cap,
VIII. Industry Cap.
IX. Counterparty cap.
X. Sector cap.
XI. Borrower's tax status.
XII. Region cap.
XIII. Branch / Business Unit Cap.
XIV. Bank's budgetary cap.
XV. Loan growth consistency factor.
XVI. Product cap.
XVII. Bank's Loan Deposit Ratio.
XVIII. Branch/Business Unit's Loan Deposit Ratio.
XIX. Term/Tenor cap.
It may be mentioned here that the guideline must not allow any subjective decision. Committee's decision must be objective and quantifiable which should indicate the score or parameter of a loan and its amount approved in compliance with laid-down procedure. Any proposal requiring subjective decision will have to be referred to the BOD.
MANAGING LOAN PORTFOLIO: There should be a few committees to manage the entire loan portfolio of a bank and depending upon the portfolio of loans, each bank should have the following committees: Policy Committee; Senior Credit Committee; Credit Committee; SMEs Committee; Personal/Consumer Loan Committee:
1) Policy Committee, headed by MD or CEO, should be the highest Executive Committee of the Bank and it will be responsible for implementation of the Credit Policy, Guideline and Loan Approval Matrix approved by the BOD and the Bangladesh Bank. They will, however, review the existing policy and if found necessary, will suggest change or updating thereof. The Policy Committee may be composed of the following members: Managing Director or Chief Executive Officer, Additional Managing Director, Deputy Managing Director, Chief Risk Officer, Chief Operating Officer, Chief Compliance Officer, and Chief Financial Officer or Head of Accounts.
The prime responsibility of this committee should be to oversee the activities of Loan Approval Committee and ensure strict compliance with the guideline and parameters approved by the Board of Directors while approving each and every loan. This committee will make sure that not a single instance of violation is reported. The main responsibilities of the committee should include a) overseeing the activities of all other committees, b) ensuring that all terms, conditions and guidelines as approved by the BOD are meticulously followed by all committees while deciding on loan applications, and c) bringing to the notice of the BOD any violation/deviation.
The Policy Committee members will be collectively and individually responsible to the Board of Directors if any violation/deviation occurs. It may be mentioned here that members of the Policy Committee can not be members of any Loan Approving Committee in the interest of ensuring check and balance.
2) Senior Credit Committee should be the bank's highest loan approving committee which will have the delegation of approving loan up to the maximum ceiling as approved by the Board of Directors. The following members will comprise this committee: Head of CRM (Credit Risk Management), Head of Credit Administration, Head of Treasury Department, Head of Operations, and Head of Retail Banking.
This committee will meticulously follow the guideline and parameters approved by the Board of Directors. It will only consider the loan proposals, the amount of which exceed Credit Committee's ceiling but is below the maximum cap approved by BOD. It will ensure strict compliance with the BOD guidelines while approving/declining loan application. It will submit report of loan approval and refusal to the Board of Directors in its every meeting.
3) Credit Committee should be the bank's regular committee for approving business/corporate loans up to a certain amount as approved by the Board of Directors. The committee will be constituted by the Head of CRM (Credit Risk Management), Head of Credit Administration, Chief Manager/Manager of Respective Branch/Business Unit, Head of Operations, and Regional Head.
This committee will also meticulously follow the guideline and parameters approved by the Board of Directors. It will only consider loan proposals which fall within the maximum cap approved by BOD. It will ensure strict compliance with the BOD guidelines while approving/declining loan applications. It will also submit report of loan approval and rejection to the Board of Directors in its every meeting.
4) SMES Committee will be established with the exclusive responsibility of handling loans sanctioned in favour of Small & Medium Enterprises (SMEs) as per guidelines/parameters approved by the Board of Directors and the Bangladesh Bank. The committee will comprise Head of SMEs Department, Head of SMEs Monitoring Department, and Chief Manager/Manager of Respective Branch/Business Unit.
This committee will also meticulously follow the guideline and parameters approved by the Board of Directors and the Bangladesh Bank as well. They will only consider the loan proposals submitted for SMEs as per definition of SMEs. It will ensure strict compliance with the BOD guidelines while approving/declining loan application. It will submit report of loan approval and rejection to the Senior Credit Committee which will review the same and forward it to the Audit department.
5) Personal/consumer Loans Committee will have the exclusive responsibility of handling personal/consumer loans as per guidelines/parameters approved by the Board of Directors and the Bangladesh Bank. The committee will consist of Head of Personal/ Consumer Loans Department, Head of Personal/Consumer Loans Monitoring Department, and Chief Manager/Manager of Respective Branch/ Business Unit.
This committee will also meticulously follow the guideline and parameters approved by the Board of Directors and the Bangladesh Bank as well. It will only consider the personal/consumer loan proposals. It will ensure strict compliance with the BOD guidelines while approving/ declining loan applications. It will submit report of loan approval and rejection to the Senior Credit Committee which will review and refer it to the Audit Department.
An officer or executive from Audit and Compliance department must not be included in any committee constituted for credit adjudication. The committee members will be held collectively and individually responsible and accountable for their activities. The individual member will, however, have right to put note of dissent on an issue if he or she does not agree with it.
REGULAR LOAN AND LARGE LOAN: Business/Corporate loans will be divided into two specific groups based on certain amount. A benchmark amount subject to the bank's risk appetite, business policy, growth prospect, loan deposit ratio and capital base will be determined and any amount below this benchmark will be considered as regular loans and any amount above the benchmark will be considered as Large Loan. Bank itself will be able to consider approving Regular Loan as per its credit policy/guideline while any large loan regardless of the amount will have to be arranged through Loan Syndication.
Nironjan Roy, CPA, CMA is a Toronto-based banker.