CHAPTER 3:

Lending policies and procedures:

Managing credit risk

Prepared by: Banking department

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 Key topics

• Types of Loans Banks

• Factors Affecting the Mix of Loans Made
• Regulation of Lending
• Creating a Written Loan Policy
• Steps in the Lending Process
• Loan Review and Loan Workouts

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 Chapter 3: Lending policies and procedures
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 Lending policy
(chính sách cho vay)
• Is a fundamental part of the credit process
whereby the lending guidelines that bank
employees follow to conduct lending business
are formalized.

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 Why do we have loan policies?

 Establishes authority, rules and framework to operate and

administer the loan portfolio effectively

 Controls lending risk

 Ensures the institution’s stability and soundness

 If reviewed regularly by the Board will ensure that

underwriting practices and loan documentation are in
accord with the Board’s tolerance for risk
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 Principles of lending policy
• Safety: Ensure that advances
are safe and money lent out
will come back
• Liquidity: Ensure that
money lent out is not locked
up for long time by designing
the loan maturity period
appropriately.
• Profitability: Earn adequate
profit on its investment
• Risk diversification: lend to
a diversified customer base
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What are the lending policies for External affair?

• Type of loans
• The repay method, maturity
• Term loan
• The “hair cut” on collateral
• Loan rate
• Price
• …
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 Group discussion
• A potential client asks bank a loan to buy a flat in a fully completed
construction apartment building. There are some related information
as follow:
a. Price included VAT is 2B VND, registration fees is 1% of the price,
land use right transfer tax is a small amount.
b. This client is ready 1.4B VND and wants to borrow a loan enough
to buy the flat.
c. This client has a 28M VND wage and 6M VND commission as an
agency of an insurance company monthly.
d. He is living with his parents.
e. Bank has a lending interest rate is 1%/month and will be stable
during the loan period, “hair-cut” is 40%. And the client's
requirement is appropriate with the bank's lending policy.
Q:
1. Classify the type of loan; what are the lending policies?
2. What are the additional information the bank needs to know and
which are the documents needed?
3. Make a repay schedule for this client

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• Một khách hàng là cá nhân có nhu cầu vay tiền để mua một căn hộ
trong một cao ốc đã xây dựng hoàn tất (khi thủ tục mua bán thực
hiện xong có thể nhận căn hộ ngay) và có những thông tin sơ bộ sau:
• a. Trị giá căn hộ là 2 tỷ đồng (đã gồm VAT), thuế trước bạ 1%/trị
giá hợp đồng, thuế chuyển quyền sử dụng đất không đáng kể.
• b. Số tiền khách hàng đã có là 1,4 tỷ đồng, muốn vay thêm 600
triệu đồng.
• c. Khách hàng cho biết thu nhập hàng tháng từ lương là 28 triệu
đồng và từ hoa hồng bán bảo hiểm nhân thọ là 6 triệu đồng.
• d. Hiện người này đang ở chung nhà với bố mẹ trên cùng địa
phương nơi dự định mua căn hộ.
• e. Lãi suất cho vay là 1,5%/tháng, không đổi trong suốt thời gian
cho vay.

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 Group discussion
• A small transportation private enterprise asks for a loan to buy a new truck for
its business.
• There are some information as below:
• A new 1.5 ton Hyundai truck from an agency of Truong Hai, the agency is
located in Hochiminh city. Price 700M VND included taxes, fees. The truck has
a 100,000kms (or a three years) guarantee, could service right after received.
• The enterprise has 02 similar trucks and these trucks have highly serviced.
Each of these trucks contributes 120M VND turnover monthly average.
• The enterprise has a 300M VND budget for the new truck and proposes a 24
months instalment loan the remaining amount to buy this new property.
• Collateral for the loan could be the new truck that formed from the loan and
some more properties of the enterprise.
• Lending interest rate is 1%/month.
• Operating costs of 2 trucks per month: 24M (DO, traffic fees), Regular cost of
the enterprise per month: 20M
Requirements:
What information and which documents your need to collect for the credit
appraisal?
Assume some more information, accordingly estimate and conclude whether the
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 Group discussion
Company X asks bank a 500M VND loan to run its business plan. The
company intend to use its factory as a collateral for the loan. The
evaluation reports that the value of land use right is worth 750M VND.
While, according to this bank’s lending policy, the “hair-cut” is 40%
(meaning that the bank willing to lend only 60% of the factory’s value
at maximum).
1. Will the company get the loan?
2. What should the company do in this situation?
Doanh nghiệp X làm giấy đề nghị vay ngân hàng 500trđ để thực hiện
phương án kinh doanh và sử dụng nhà xưởng làm tài sản đảm bảo nợ
vay. Sau khi thẩm định giá tài sản (bao gồm quyền sử dụng đất) được
đánh giá là 750 trđ. Theo chính sách tín dụng thì mức cho vay tối đa
đối với tài sản này là 60% giá trị tài sản.
• Thảo luận:
1. Doanh nghiệp X liệu có được NH cấp tín dụng không?
2. Trong trường hợp doanh nghiệp X muốn được NH cấp tín dụng thì
cần phải làm những gì?

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 Type of loans
 Real Estate Loans (Cho vay bất động sản)
 Financial Institution Loans (Cho vay các tổ chức
tài chính)
 Agriculture Loans (Cho vay nông nghiệp)
 Commercial and Industrial Loans ( Cho vay các
tổ chức thương mại, công ty)
 Loans to Individuals (Cho vay cá nhân)
 Miscellaneous Loans (các khoản cho vay khác)
 Lease Financing Receivables ( Cho thuê TS tài
chính)
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• Real estate loans: are secured by real
property-land, building and other structures
• Financial institution loans: Credit to banks,
insurance companies, finance companies and
other financial institutions
• Agricultural loans: are extended to farms and
ranches

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• Commercial and industrial loans: Granted to
business to cover purchasing inventories,
taxes..
• Loans to individuals: For individual purposes
• Miscellaneous loans: not listed above,
including securities' loans.
• Lease financing receivables: Lender buys
equipment or vehicles and leases to customers
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 U.S. banks as of June 30, 2005

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 Factors Determining the Growth and Mix of
Loans
 Characteristics of the market area
 Lender size:
 Wholesale lenders vs. retail credit
 Experience and expertise of management
 Loan policy
 Expected yield of each type of loan
 Regulation

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 Steps in the lending process
1. Finding prospective loan customers
2. Evaluating customers’ character
3. Making site visits and evaluating customers
4. Evaluate Customers’ financial condition
5. Assessing possible Loan Collateral
6. Signing loan agreement
7. Monitor compliance with Loan agreement

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 Regulation of lending

• bank’s asset-quality rating

1 = strong performance
2 = satisfactory performance
3 = fair performance
4 = marginal performance
5 = unsatisfactory performance

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 Regulation of Lending (continued)

• Criticized loans: Loans that are performing well

but have minor weaknesses because the lender has
not followed its own loan policy or has failed to
get full documentation from the borrower
• Scheduled loans: Loans that appear to contain
significant weaknesses or that represent what the
examiner regards as a dangerous concentration of
credit in one borrower or in one industry

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• Adversely classified loans (các khoản cho vay
bất lợi)
• Substandard loans: where the loans’ margin of
protection is inadequate due to weaknesses in
collateral or in the borrower’s repayment abilities.
• Doubtful loans: which carry a strong probability
of an uncollectible loss to the lending institution
• Loss loans: regarded as uncollectible and not
suitable to be called bankable assets
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 Loan classified by quality (Vietnam)
1. Standard loans: less than 07 days out of date.
2. Doubtful loans: from 7 to 90 days out of date

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 Vietcombank – Financial report

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 Quick quizz

1. The principal economic function of banks is

to:
A) Take deposits
B) Make loans
C) Sell financial services
D) Encourage spending

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2. According to the textbook the largest category
(by dollar volume) of loans extended by U.S.
banks is:
A) Real estate loans
B) Financial institutions
C) Agricultural loans
D) Commercial and industrial loans

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3. Banks that emphasize lending to commercial
customers are labeled:
A. Wholesale banks
B. Retail banks
C. Personal banks
D. Nonbank banks

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4. A loan to a local business to purchase a new
machine would be categorized as:
A) A consumer loan
B) An agriculture loan
C) A commercial and industrial loan
D) A real estate loan

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5.A loan that appears to examiners to contain
significant weaknesses or that represent a
dangerous concentration of credit in one
borrower or industry are called:
A) Criticized loans
B) Scheduled loans
C) Substandard loans
D) Doubtful loans
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 CAMELS ratings

 Developed in US
 To analyze bank risk
 Helps to evaluate banks with complete coverage
of factors affecting banks creditworthiness
 Is now industry standard
 Rating 1,2, 3 is less riskier than rating 4,5

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 CAMELS

Capital adequacy (An toàn vốn)

Asset quality (Chất lượng tài sản)
Management quality (năng lực QL)
Earnings record (Khả năng sinh lời)
Liquidity position (Mức độ TK)
Sensitivity to market risk

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 A written loan policy
(Chính sách cho vay)

• Banks can make sure its loans meet regulatory

standards and are profitable.
• Gives guidelines in making decisions

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 Twelve Elements of a Good Loan Policy

1. A goal statement
2. Specify lending authority to each loan officer
3. Lines of responsibility in making assignments
and reporting information
4. Operating procedures for on customer
applications

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5. Documentation for complete application
6. State who maintains credit files
7. Collateral guidelines

8. Loan rating and loss reserves

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9. How interest rates and fees are set
10.A statement of the preferred upper limit for total
loans outstanding
11.Describe trade area, from which most loans
should come
12. How to detect, analyze, and work out problem
loans
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 Credit Analysis:
What makes a good loan?

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 Q1. Is the borrower creditworthy?
Character
(Thái độ) Capacity
Control (Năng lực)
(Kiểm soát-
law)

6C Cash
(Dòng tiền)

Conditions
(Các đk Collateral
khác) (TS ĐB)

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 Group discussion – 5 mins
Under which of the six Cs of credit discussed in this chapter
does each of the following pieces of information belong?
a. First National Bank discovers there is already a lien against
the fixed assets of one of its customers asking for a loan.
b. Xron Corporation has asked for a type of loan its lender
normally refuses to make.
c. John Selman has an excellent credit rating.
d. Smithe Manufacturing Company has achieved higher
earnings each year for the past six years
e. Consumers Savings Association’s auto loan officer asks a
prospective customer, Harold Ikels, for his driver’s license.
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 Group discussion

a. First National Bank discovers there is already a lien

against the fixed assets of one of its customers asking for
a loan. Collateral
b. Xron Corporation has asked for a type of loan its lender
normally refuses to make. Control
c. John Selman has an excellent credit rating. Character
d. Smithe Manufacturing Company has achieved higher
earnings each year for the past six years Cash
e. Consumers Savings Association’s auto loan officer asks
a prospective customer, Harold Ikels, for his driver’s
license Capacity
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Q2. Can the loan agreement be properly
structured to protect the lender and the public’s
funds?

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 Customer depositors

Stockholders

Loan officer
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Q3. Can the lender perfect its claim against the
borrowers’ earnings and any assets that may be
pledged as collateral?

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 Q3.

• Reasons for taking collateral:

> If the borrower can not pay, the pledge of
collateral gives the lender the right to cover what
the borrower did not pay back.
> Give the lender a psychological advantage
over the borrower .
>>> Perfect claim

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 Types of loan collateral

• Accounts receivable (khoản phải thu)

• Factoring (bao thanh toán)
• Inventory (Hàng tồn kho)
• Real property (Tài sản thực)
• Personal property (Tài sản cá nhân)
• Personal guarantees (Bảo đảm (lãnh) cá nhân)

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 Case study 1

Ngân hàng A cho công ty B vay vốn để kinh doanh, thời

hạn vay từ tháng 1 đến tháng 6 năm 2000. Ngân hàng C
phát hành bào lãnh cho giao dịch nói trên. Cuối thàng
12 năm 2000, ngân hàng C đựơc yêu cầu thực hiện bảo
lãnh từ phía ngân hàng A.
Hãy cho biết:

a- Các thành phần trong quan hệ bảo lãnh nói trên.

b- Cách xử lý của ngân hàng C trước yêu cầu của ngân
hàng A.

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 Case study 2

Một hộ nông dân có nhu cầu vay vốn để trồng lúa

với diện tích là 2 ha. Hộ canh tác trên diện tích của
gia đình với 2 lao động chính. Số tiền vay là 2,5 trđ
để mua giống (tại trạm giống, cây trồng huyện).
• Là cán bộ tín dụng, anh/chị có chấp nhận số tiền
vay này không?
• Cho ý kiến về hướng giải ngân?
• Biết rằng định mức cho loại hộ vay này là 1,8
trđ/vụ/ha.
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Sources of Information about Loan customers

• Check CIC (in US: RMA):

• Nhóm 1: Dư nợ đủ tiêu chuẩn ( Không quá hạn từ 1 đến
dưới 10 ngày)
• Nhóm 2: Nợ nần cần chú ý (Nợ từ 10 đến dưới 90 ngày)
• Nhóm 3: Dư nợ dưới tiêu chuẩn (trên 90 đến 180 ngày)
• Nhóm 4: Dư nợ có nghi ngờ (Từ 181 đến 360 ngày)
• Nhóm 5: Dư nợ có khả năng mất vốn (nợ quá hạn trên
360 ngày)

• Check from Exchanges (if it is listed firms)

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 Parts of typical loan agreement
• The Note: signed by the borrower, specifies the
principal amount of the loan
• Loan commitment Agreement (Hợp đồng)
• Collateral (TSĐB)
• Covenants (Các giao ước):
Affirmative (positive) / Negative (restrictive) covenants
• Borrower Guaranties or Warranties
• Events of Default (Mất khả năng thanh toán/ phá
sản): specify what actions or inactions in the
event of default

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 LOAN REVIEW

The examination of outstanding loans (dư

nợ) to make sure borrowers are adhering
(tuân thủ) to the credit agreements and the
bank is following its own loan policies

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 LOAN REVIEW PROCEDURES

1. Carrying out a review of all types of loans on

a periodic basis.
2. Structuring the loan process
3. Reviewing largest loans most frequently
4. Conducting more frequent reviews of
troubled loans
5. Accelerating the loan review schedule if
economy or industry experiences problems
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 WARNING SIGNS OF PROBLEM LOANS

1. Unusual or unexpected delays in receiving financial

statements.
2. Any sudden changes in accounting methods.
3. Restructuring debt or eliminating dividend payments
or changes in credit rating.
4. Adverse changes in the price of stock.
5. Losses in one or more years.
6. Adverse changes in capital structure.
7. Deviations in actual sales from predictions.
8. Unexpected and unexplained changes in deposits
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 Loan Workout

The process of resolving a troubled loan so the

bank can recover its funds.

(Read Textbook, page 534)

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 Quick quizz

1. The______________ is a uniform rating

system developed by regulators where banks are
given a rating from one to five in each of six
categories and an overall rating from one to five
A. 6C
B. CAPM
C. CAMELS
D. Moody
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2. One of the 6 C’s of lending,______________
suggests that the lender must look at the position
of the business firm in the industry and the
outlook of the industry to evaluate a loan
A. Condition
B. Control
C. Collateral
D. Capacity
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3. Loans that have minor weaknesses because the
bank has not followed its written loan policy or
which have missing documentation are
called______________ by regulators
A. Criticized
B. Scheduled
C. Doubtful
D. Loss Loan
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4. A______________ is the process of resolving
a troubled loan so the bank can recover its funds.
A. Loan workout
B. Loss Loan
C. Collect collateral
D. Loan review

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5. One of the most widely consulted sources of data
on business firms is which was
founded in Philadelphia in 1914 to exchange credit
information among business lending institutions and
to organize conferences and publish educational
materials to train loan officers and credit analysts.
A. RMA
B. CIC
C. IMF
D. Credit Union

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6. Affirmative covenants restrict a borrower from
doing certain things.
A. TRUE
B. FALSE

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7. A rating of “5” is the highest and best rating
that a U.S. bank can receive under the CAMEL
rating system.
A. TRUE
B. FALSE

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8. If the economy slows down a bank should
review its outstanding loans more frequently
A. TRUE
B. FALSE

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9. The type of bank loan experiencing the largest
losses per dollar of loan is credit card loans.
A. TRUE
B. FALSE

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10. A written loan policy gives loan officers and
the bank’s management specific guidelines in
making individual loan decisions and in forming
the bank’s loan portfolio.
A. TRUE
B. FALSE

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