CHAPTER 4:

LENDING POLICIES AND PROCEDURES

Prepared by: Banking department

Chapter 4: Lending policies and procedures

06/27/2022 1
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 2
- Commercial Banking 1 - B01028
 Chapter 4: Lending policies and procedures
06/27/2022 3
- Commercial Banking 1 - B01028
 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.

Chapter 4: Lending policies and procedures

06/27/2022 4
- Commercial Banking 1 - B01028
 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
Chapter 4: Lending policies and procedures
06/27/2022 5
- Commercial Banking 1 - B01028
 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
Chapter 4: Lending policies and procedures
06/27/2022 6
- Commercial Banking 1 - B01028
 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
• …
Chapter 4: Lending policies and procedures
06/27/2022 7
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 8
- Commercial Banking 1 - B01028
• 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.

Chapter 4: Lending policies and procedures

06/27/2022 9
- Commercial Banking 1 - B01028
 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
loan might be approved? Chapter 4: Lending policies and procedures
10
06/27/2022 - Commercial Banking 1 - B01028
 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?
Chapter 4: Lending policies and procedures
06/27/2022 11
- Commercial Banking 1 - B01028
 Chapter 4: Lending policies and procedures
06/27/2022 12
- Commercial Banking 1 - B01028
 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)
Chapter 4: Lending policies and procedures
06/27/2022 13
- Commercial Banking 1 - B01028
• 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

Chapter 4: Lending policies and procedures

06/27/2022 14
- Commercial Banking 1 - B01028
• 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
Chapter 4: Lending policies and procedures
06/27/2022 15
- Commercial Banking 1 - B01028
 U.S. banks as of June 30, 2005

Chapter 4: Lending policies and procedures

06/27/2022 16
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 17
- Commercial Banking 1 - B01028
 Market share - 2014

Chapter 4: Lending policies and procedures

06/27/2022 18
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 19
- Commercial Banking 1 - B01028
 Regulation of lending

• bank’s asset-quality rating

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

Chapter 4: Lending policies and procedures

06/27/2022 20
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 21
- Commercial Banking 1 - B01028
 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
Chapter 4: Lending policies and procedures
06/27/2022 22
- Commercial Banking 1 - B01028
 Vietcombank – Financial report

Chapter 4: Lending policies and procedures

06/27/2022 23
- Commercial Banking 1 - B01028
 Quick quizz

1. The principal economic function of banks is

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

Chapter 4: Lending policies and procedures

06/27/2022 24
- Commercial Banking 1 - B01028
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

Chapter 4: Lending policies and procedures

06/27/2022 25
- Commercial Banking 1 - B01028
3. Banks that emphasize lending to commercial
customers are labeled:
A. Wholesale banks
B. Retail banks
C. Personal banks
D. Nonbank banks

Chapter 4: Lending policies and procedures

06/27/2022 26
- Commercial Banking 1 - B01028
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

Chapter 4: Lending policies and procedures

06/27/2022 27
- Commercial Banking 1 - B01028
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
Chapter 4: Lending policies and procedures
06/27/2022 28
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 29
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 30
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 31
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 32
- Commercial Banking 1 - B01028
5. Documentation for complete application
6. State who maintains credit files

7. Collateral guidelines

8. Loan rating and loss reserves

Chapter 4: Lending policies and procedures

06/27/2022 33
- Commercial Banking 1 - B01028
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
Chapter 4: Lending policies and procedures
06/27/2022 34
- Commercial Banking 1 - B01028
 Credit Analysis:
What makes a good loan?

Chapter 4: Lending policies and procedures

06/27/2022 35
- Commercial Banking 1 - B01028
 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)

Chapter 4: Lending policies and procedures

06/27/2022 36
- Commercial Banking 1 - B01028
 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.
Chapter 4: Lending policies and procedures
06/27/2022 37
- Commercial Banking 1 - B01028
 Chapter 4: Lending policies and procedures
06/27/2022 38
- Commercial Banking 1 - B01028
 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
Chapter 4: Lending policies and procedures
06/27/2022 39
- Commercial Banking 1 - B01028
Q2. Can the loan agreement be properly
structured to protect the lender and the public’s
funds?

Chapter 4: Lending policies and procedures

06/27/2022 40
- Commercial Banking 1 - B01028
 Customer depositors

Stockholders

Loan officer
Chapter 4: Lending policies and procedures
06/27/2022 41
- Commercial Banking 1 - B01028
Q3. Can the lender perfect its claim against the
borrowers’ earnings and any assets that may be
pledged as collateral?

Chapter 4: Lending policies and procedures

06/27/2022 42
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 43
- Commercial Banking 1 - B01028
 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)

Chapter 4: Lending policies and procedures

06/27/2022 44
- Commercial Banking 1 - B01028
 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.
Chapter 4: Lending policies and procedures
06/27/2022 45
- Commercial Banking 1 - B01028
 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.
Chapter 4: Lending policies and procedures
06/27/2022 46
- Commercial Banking 1 - B01028
 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)

Chapter 4: Lending policies and procedures
06/27/2022 47
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 48
- Commercial Banking 1 - B01028
 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

Chapter 4: Lending policies and procedures

06/27/2022 49
- Commercial Banking 1 - B01028
 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
Chapter 4: Lending policies and procedures
06/27/2022 50
- Commercial Banking 1 - B01028
 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
Chapter 4: Lending policies and procedures
06/27/2022 51
- Commercial Banking 1 - B01028
 Loan Workout

 The process of resolving a troubled loan so the

bank can recover its funds.

(Read Textbook, page 534)

Chapter 4: Lending policies and procedures

06/27/2022 52
- Commercial Banking 1 - B01028
 IN VIETNAM

Chapter 4: Lending policies and procedures

06/27/2022 53
- Commercial Banking 1 - B01028
 Chapter 4: Lending policies and procedures
06/27/2022 54
- Commercial Banking 1 - B01028
 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
Chapter 4: Lending policies and procedures
06/27/2022 55
- Commercial Banking 1 - B01028
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
Chapter 4: Lending policies and procedures
06/27/2022 56
- Commercial Banking 1 - B01028
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
Chapter 4: Lending policies and procedures
06/27/2022 57
- Commercial Banking 1 - B01028
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

Chapter 4: Lending policies and procedures

06/27/2022 58
- Commercial Banking 1 - B01028
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
Chapter 4: Lending policies and procedures
06/27/2022 59
- Commercial Banking 1 - B01028
6. Affirmative covenants restrict a borrower from
doing certain things.
A. TRUE
B. FALSE

Chapter 4: Lending policies and procedures

06/27/2022 60
- Commercial Banking 1 - B01028
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

Chapter 4: Lending policies and procedures

06/27/2022 61
- Commercial Banking 1 - B01028
8. If the economy slows down a bank should
review its outstanding loans more frequently
A. TRUE
B. FALSE

Chapter 4: Lending policies and procedures

06/27/2022 62
- Commercial Banking 1 - B01028
9. The type of bank loan experiencing the largest
losses per dollar of loan is credit card loans.
A. TRUE
B. FALSE

Chapter 4: Lending policies and procedures

06/27/2022 63
- Commercial Banking 1 - B01028
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

Chapter 4: Lending policies and procedures

06/27/2022 64
- Commercial Banking 1 - B01028