CREDIT MANAGEMENT.pdf - Christian Service University College

loan has been approved, the officer notifies the borrower and prepares a loan
agreement. This agreement formalises the purpose of the loan, the terms, repayment
schedule, collateral required, and any loan covenants. It also states what conditions
may be included such as the principal and interest payment, the sale of substantial
asset, declaration of bankruptcy, and breaking any restrictive loan covenant. The
officer then checks that all documentation is present and in order. The borrower signs
the agreement along with other guarantors, turns over the collateral if necessary, and
receives the loan proceeds.
Credit review
The loan review effort is directed at reducing risk as well as handling problem loan
and liquidating assets of failed borrowers. Effective credit management separates loan
review from credit analyses, execution and administration. The review process can be
divided into monitoring the performance of existing loans and handling problem
loans. Many banks have a formal loan review committee that reports directly to the
chief executive officer and directors to verify that the borrower’s financial condition
is acceptable, loan documentation is in order, and pricing meets return objective. If
the audit discovers problems, the committee initiates corrective actions.
2.5 PRINCIPLES OF LENDING
Elisabeth Rhyne and Sharon L. Holt, in the year 1994, identified four distinct principles
of lending and these are:
17