LOAN PROCESSING AND APPRAISAL

LOAN

What is loan processing?

Loan processing refers to the inter-related activities undertaken from time to time the prospective loanee applies for the loan up to the time the loan is approved, agreement signed and loan secured.

The following are the main steps in the process:-

i)  Loan application

ii) Loan appraisal

iii) Loan approval

iv) Loan collateralisation and documentation

 

  1. 1.       Loan application

The loan application starts with the formal expression by the borrower that he/she needs a loan. Some Saccos provide members with free loan application forms while others sell the forms at a small fee.

  1. 2.       Loan appraisal

Loan appraisal is one of the most technical areas in the lending process and any mistake made here could translate itself into cases of default and delinquency. All the principles of good lending should be adhered to. The process should also be as thorough as possible without resulting into unnecessary delays on loan processing.

Objectives in credit appraisal

a)      To determine the type of loan, loan purpose and whether it is confirming with the credit policy and procedures of the Sacco;

b)      To determine the credit risk of lending to the applicant;

c)       To determine the loanee’s plan to repay the loan and if she/he has other sources of income and;

d)      To determine whether the loanee meets the security or collateralization requirements.

What is a good loan?

A loan given:-

i) To a reliable borrower

ii) For an approved good purpose

iii) Against an acceptable security

iv) At a profit to the lender

Main issues which must be addressed when appraising loans

  1. A.      Conformity with policies and procedures

a)      Whether applicant followed all the requirements stipulated in the credit policies of the Sacco contained in the By-Laws or other policy documents

b)      Verification of whether the applicants’ information given is correct.

  1. B.      Addressing the issue of credit risk

This is normally looked at in form of the 5Cs of assessing credit risk

i) Character- Behaviour history of the borrower

ii) Capacity- Ability to repay the loan

iii) Capital- What financial ability does the borrower have?

iv) Conditions- Has the member fulfilled all the required conditions?

v)  Collateral (Security) – Guarantee required for the loan.

  1. C.      Where money borrowed is for starting a business

The credit committee should address the following issues. Ideally the committee should require the borrower to prepare a detailed business plan. This is the standard practice in all financial institutions that lend money to business people. The business plan should have the following details:-

a)      Financial viability

b)      Marketing feasibility

c)       Technical feasibility

d)      Management and organizational capability

The main concern for the Sacco should be whether given the above assessment, the intended business can run profitably and help repay the loan successfully.

Checklist for loan appraisal

The following information should be thoroughly addressed when appraising loan applications:-

a)      General particulars (name, address, family details) by the credit committee

b)      Loan amount and purpose for the loan requested

c)       Technical feasibility when a loan is for a business project

d)      Marketing feasibility

e)      Financial viability

f)       Management and organization of the business

g)      Loan repayment arrangements- mode of repayment

h)      Collateral arrangement for the loan

Does and donts of lending

Dos

a)      Be fair to both the sacco and the applicant

b)      Listen to the borrower carefully

c)       Try to have the member clarify all issues that may be unclear before you make a decision on the loan

d)      Decide firmly and convey the decision truthfully to the member

Donts

a)      Go by opinions. Verify all facts before making decisions

b)      Pretend to have the knowledge which you don’t have

c)       Have biases against the member

d)      Reject a loan application before studying it thoroughly

  1. 3.       Loan approval

Usually an approval is conveyed through a formal letter called loan approval advice. The advice apart from conveying the approval decision asks the borrower to communicate the he/she has accepted the loan and the terms and conditions attached to the loan.

  1. 4.       Loan collateralization

Loan collateralization refers to the loan security arrangements. In most Saccos loans are secured using members shares and savings in the Sacco. However some Saccos especially those that serve members from the informal sector ask for other assets for guarantee of loans.

To make sure that the loan security arrangement is properly done, Sacco officials should make such members have signed loan guarantee forms with guarantors stating clearly that they are prepared to repay the loan in case of default by the borrower.

After the final loan approval, the borrower should sign a formal loan agreement form, which clearly states the terms and conditions of the loan.

Problems faced by Saccos in their lending activities

a)      Lack of good credit policies

b)      High loan default mainly due to retrenchments

c)       Excess demand for loans that outstrip available resources

d)      Inadequate loans appraisal skills by credit committees

e)      Borrowing expensive money for lending to members at non-competitive interest rates.

 

 

Advertisements

One Response

  1. … [Trackback]

    […] There you will find 94894 more Infos: funnyardstick.wordpress.com/2013/10/24/loan-processing-and-appraisal/ […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: