Assests in loan portfolio

sunandaC

New member
Means of classifying assets in the loan portfolio

Duration

Loans can be classified by their duration or tenor as follows
Short term loans - term one year or less
Medium term loans - term one to five years
Long term loans - term above five years

A large portion of the bank loans will be of short term as they carry less risk than medium or long term loans. Analysing the duration wise mismatch of the bank’s assets and liabilities shows how the bank does Asset liability management.

2) Borrower type

Wholesale or Retail lending
According to the size i.e. whether the borrowers are large companies or small and medium sized enterprises.
Customer categories like Commercial and industrial loans
Consumer loans
Real estate loans
Agricultural loans
Inter bank and Financial institution loans

By the Industry to which the borrower belongs e.g. auto, steel, cement etc

Over Concentrations

1) Over concentration by industry
When too high percentage of loans is made to a particular industry the bank becomes vulnerable to a downturn in that industry.

2) Over concentration by geography
Economic downturn or a cataclysm affecting the locale of the bank’s operations affects the bank.

3) Over concentration by individual borrower
This holds the bank hostage to the fortunes of that borrower.

4) Over concentration by size
A small number of large loans are more risky than a large number of small loans.

5) Excessive lending to cyclical industries
This will make the bank vulnerable to the wild swings between boom and bust of that industry.


6) Excessive real estate lending –
Generally the property market is highly cyclical in nature. A bank that lends heavily to real estate developers will find itself in a difficult situation when market turns negative and developers face cash flow problems.

Lending to finance existing real estate for investment purposes is less risky than real estate development.

7) Lending to industries in decline or imminent deregulation –
Deregulation of the industry they have lent to or lending to a mature industry on a decline can negatively affect the bank.

If the bank only is a target of deregulation i.e. if it is a Government bank which lends primarily to large and inefficient state owned enterprises and ultimately survive on cash injections and deposit guarantees then in the era of privatization they will find it difficult to survive unless they change their credit culture.

8) Foreign currency lending –
It should be done in prudently so that there is no adverse impact on the bank.
 

rosemarry2

MP Guru
Means of classifying assets in the loan portfolio

Duration

Loans can be classified by their duration or tenor as follows
Short term loans - term one year or less
Medium term loans - term one to five years
Long term loans - term above five years

A large portion of the bank loans will be of short term as they carry less risk than medium or long term loans. Analysing the duration wise mismatch of the bank’s assets and liabilities shows how the bank does Asset liability management.

2) Borrower type

Wholesale or Retail lending
According to the size i.e. whether the borrowers are large companies or small and medium sized enterprises.
Customer categories like Commercial and industrial loans
Consumer loans
Real estate loans
Agricultural loans
Inter bank and Financial institution loans

By the Industry to which the borrower belongs e.g. auto, steel, cement etc

Over Concentrations

1) Over concentration by industry
When too high percentage of loans is made to a particular industry the bank becomes vulnerable to a downturn in that industry.

2) Over concentration by geography
Economic downturn or a cataclysm affecting the locale of the bank’s operations affects the bank.

3) Over concentration by individual borrower
This holds the bank hostage to the fortunes of that borrower.

4) Over concentration by size
A small number of large loans are more risky than a large number of small loans.

5) Excessive lending to cyclical industries
This will make the bank vulnerable to the wild swings between boom and bust of that industry.


6) Excessive real estate lending –
Generally the property market is highly cyclical in nature. A bank that lends heavily to real estate developers will find itself in a difficult situation when market turns negative and developers face cash flow problems.

Lending to finance existing real estate for investment purposes is less risky than real estate development.

7) Lending to industries in decline or imminent deregulation –
Deregulation of the industry they have lent to or lending to a mature industry on a decline can negatively affect the bank.

If the bank only is a target of deregulation i.e. if it is a Government bank which lends primarily to large and inefficient state owned enterprises and ultimately survive on cash injections and deposit guarantees then in the era of privatization they will find it difficult to survive unless they change their credit culture.

8) Foreign currency lending –
It should be done in prudently so that there is no adverse impact on the bank.

Hey friend,

Here I am uploading Notes on credit risk - loan portfolio management, so please download and check it.
 

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