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Borrower selection in Credit Operations

Borrower selection

A bank usually has procedural guidelines indicating list and sequence of several activities associated with its credit operations. The procedural guideline is prepared in the light of Credit Risk Manual introduced by Bangladesh Bank. However, bank’s own credit policy vision, mission as well as guidelines and policies given by Central Bank from time to time are also reflected in procedural guidelines. The activities of credit operations start with discussion between bank and client and end with adjustment and/or recovery of loan. Credit operations in banks may be centralized or decentralized.
Each year a financial institute prepares a credit budget indicating the amount of credit to be sanctioned and disbursed in different areas, categories, products and sectors. Credit committee of bank is entrusted to sanction and disburse the budgeted amount prudently. Generally, there is a credit committee in head office of each bank which reviews every aspect of a loan proposal to be considered in approving and sanctioning loan.

Relationship Management (RM) act as a primary bank contact with a borrower. At first, the banker and the customer discuss with each other about the credit facilities offered by the bank and required by the customer. Through discussion, RM is to ensure that proposed credits from expected business segment/sector and for permissible and expected credit facility. RM also ensures that there is a scope of lending to the client. After a successful discussion, customer is to apply for credit in a prescribed format provided by the bank. After receiving
loan application from the prospective borrower, RM scrutinizes the submitted information and collects all other required information from different parties including Credit Information Bureau (CIB) report.
Only sanctioning a credit will not serve the purpose of the bank. It is only good credit that will serve the purpose of the bank. It is even better not to sanction any credit rather than sanctioning a bad credit. Selection of good borrower is the starting point of the process of creation of good credit. Before sanctioning credit, a banker wants to be sure about the repayment. For ensuring loan repayment a bank can go for preventing measure or curative measure or both. But curative measures are always costlier than preventive terms of both time and money. So credit investigation as a preventive measure is required for selection of good borrower. Credit investigation and selection of good borrower may substantially help a bank in the recovery of extended credit.