By: Ian Strout, Senior Credit Risk Specialist
When I perform loan reviews for community banks, I’m surprised by the lending staff’s dominance of the loan approval process. The involvement of a credit department in the loan approval process is crucial to the maintenance of a quality loan portfolio.
A lending staff’s primary function is to generate revenue for the bank by both generating new borrowers and by cross-selling existing products to existing clients. A credit department’s primary focus is to ensure that all loans are approved in accordance with the Bank’s lending and credit policies and to assess the sufficiency of a borrower’s cash flow to repay the subject loan. There’s an inherent tension in this relationship, as a borrower that has the potential to be profitable may not be the most creditworthy. However, it is important for banks to maintain a credit department staffed with a credit manager for the following reasons:
In order to maintain a degree of autonomy from the lending staff, banks may consider allowing the credit department to report to a credit officer as opposed to a senior lender.
The lending department can aid credit departments through the following measures:
The credit and lending departments of a bank may not always agree regarding which loans should be approved. However, the presence of a well-managed credit department that works cooperatively with the lending staff can lead to a stronger overall loan portfolio.
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