Briefly describe the borrower selection process in banks

Selecting the right borrower is the starting point for creating good credit. A bad borrower selection leads to Non-Performing Loans (NPLs). The bank follows a structured process to select the right borrower.

The borrower selection process is composed of 13 steps. Have a look at the borrower selection process below:

Step-1: Expected Business Segment Check

This is the first step of selecting borrowers in banks. The bank first ensures the credit application comes from permitted business segments/sectors. The type of facility must also match the bank’s permitted products.

Step-2: Receiving and Scrutinizing Loan Application

The customer applies in a prescribed format. The bank scrutinizes the submitted information and collects all required documents.

Step-3: Lending Target and Exposure Check

Once the customer applies for a loan, the bank checks whether the industry/sector lending target has been reached. It also verifies the single borrower/group limit set by Bangladesh Bank.

Step-4: Managerial, Organizational, Marketing, and Technical Appraisal

In this step, the bank assesses the borrower’s management quality, business organization, market position, and technical capabilities.

Step-5: CIB, Bank Statements, and Contact Point Verification

At this stage, the bank collects a CIB report from Bangladesh Bank. The bank collects bank statements and conducts contact point verifications to check the borrower’s banking history.

Step-6: Financial Statement Analysis

In this step, the bank analyzes past financial statements using ratio analysis: liquidity, profitability, leverage, coverage, and activity ratios.

Step-7: Financial Projections Analysis

In this stage, the bank analyzes the projected financial statements to assess the borrower’s future repayment ability.

Step-8: Loan Structure Finalization

In this stage, both parties finalize the loan type, pricing, tenure, and mode of repayment at an acceptable point.

Step-9: Security Arrangement

The bank assesses primary and collateral security for nature, amount, and quality.

Step-10: Socio-Economic and Environmental Assessment

The bank considers the social and environmental impact of the proposed project before making a final decision.

Step-11: Completing ICRRS

In this step, the bank completes the Internal Credit Risk Rating. The rating must be Excellent or Good for normal lending.

Step-12: Sanction and Documentation

If all aspects are satisfactory, the bank sanctions the loan and completes the documentation.

Step-13: Disbursement

The bank disburses the loan only after all terms, conditions, and documentation are fully complied with.

Credit Operations & Management, Module: B, 98th Exam Q2(a), 96th Exam Q3(a)