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The Loan Committee Process

If you have ever requested a loan for your company from a bank, you probably have been curious about how the committee process for loan approvals works. Here's a little insight which may be of help.

Committee Members

The members of a typical bank loan committee can come from various areas in the bank including the heads of the departments indicated below.
  • Credit Department Representative - This person oversees the analysis of your financial statements and comparative industry data. This person may or may not have actual lending experience, but probably has extensive experience in credit analysis.
  • Lending Department Representative - This person is responsible for the lending officers (line officers) who are in direct contact with their customers. Depending upon how the bank is organized, there may be one or more lending departments represented, e.g., the Metropolitan, Private Banking, National and International Departments.
  • Credit Policy Representative - This person sets the general and specific guidelines for prudent lending at the bank, watching, for instance, trends in delinquencies and charge offs, and concentrations of loans to one industry.
  • Executive Management Representative - At smaller banks, the President may sit on the loan committee. At larger banks, this responsibility may be delegated to an Executive Vice President or another senior officer of the bank.
Meeting Schedule And Agenda
Loan Committees meet on regular schedules from daily to weekly depending upon bank size and amount of loan activity. In some banks, the loan request must go through two or more levels of committee approval, which may include board members.

An agenda is established prior to the meeting giving a certain time period for each loan presentation by the lending officer. The agenda may include line of credit renewals, which typically are required on an annual basis, and new loans to current and prospective borrowers. A typical presentation will last for about 5-10 minutes with discussion following for 10-20 minutes. More complex proposals can extend to 45-60 minutes. Line of credit renewals may take only a few minutes. Information presented to the committee usually includes a spread of the prospective borrower's financial statements (balance sheet, income statement) for the last five years with the most recent interim.

Accompanying the spread are the key financial ratios and cash flow data, and a subjective analysis of that data prepared by the lending officer or Credit Department. Most banks have computerized spreading systems which set forth the company's financial history in a neat, orderly format. The company's financial ratios may be compared to industry data, such as the Robert Morris Associates Statement Analysis.

The written loan presentation, which normally is distributed to committee members prior to their meeting, will include background information on the company, including products, management and history.

Considerations Of The Loan Committee
The primary considerations of the loan committee in reviewing loan requests are: 1) ability to repay (cash flow) 2) balance sheet condition 3) collateral 4) management 5) trends and prospects for the future. The spread of the company's historical financial statements is the most important component when considering a loan request, since it indicates the ability to repay the loan. If a positive performance has not been demonstrated, then collateral becomes the main focus of the committee's discussion. This is not to understate the importance to the committee of the strength of management and company's prospects for financial performance.

Nuances Of Loan Committees
Like other committees, loan committees are comprised of dominant members who ask many of the questions, and who probably influence the decisions of others. In addition, each member comes with a different background and a different set of experiences which influence his/her opinions and concerns. For example, the head of the Credit Department is concerned with the financial analysis of the borrower and may ask detailed questions about the financial statement spread. The head of Credit Policy may be concerned about concentration of loans to one industry or about the proper amount of collateral securing a loan. The lending officer presenting the loan request wants to build his or her loan portfolio and, of course, wants to present the borrower in the best possible light. The senior executive may have to weigh all the factors and lead the discussion in the right direction.

The Importance Of A Good Lending Officer
Since most or all of the committee members have not met the management team of the prospective borrower, nor have they visited the borrower's facilities, the borrower must rely on the lending officer to present its case effectively. If the financial data is strong, the loan may be approved regardless of the effectiveness of the presenter. If the financial data is weak, however, it may take a strong and convincing presenter to get the loan approved. It is important, therefore, to ensure that your lending officer has a thorough knowledge of your company's history, its products, management and financial statements and shares the vision for your company's future.

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