Question

Ebenezer is the CEO of a successful small business and would like to double the size of their current loan with First National Bank. He approaches the bank manager at First National Bank with the following facts; the business has proven to be successful in the past, the last three years have shown increases in sales and earnings, our business already has an existing loan of $500,000 with the bank. Which of the following should not be a consideration of the bank manager approving the loan

• The business has established a relationship with the bank based on the $500,000 loan.

• Sales and earnings have increased over the last three years.

• Ebenezer promises to give the bank manager an extra $1,000 if she approves the loan.  

• The business has been successful in the past.

Answer 1

Following are the factors a bank manager must cosider before approving the loan for any client in order to avoid prospective or future NPA's (Non Performing Assets)-

CREDIT HISTORY

Banks manager should always prefer people with clean financial habits. A credit score tells a lot about your financial health. Whether you pay your EMIs on time or default can be easily checked through your credit report, which is maintained by different bureaus. Bank manager should consider whether Ebenezer is paying the installments of first $500000 loan in timely manner.

OCCUPATION

There are some occupations that banks prefer. For example, in many government banks, government and PSU employees are most preferred as they have a stable job. After government employees, banks prefer people working with blue-chip companies and doctors. Further down the line come chartered accountants, engineers and lawyers. People working in private companies and self-employed get the lowest scores. Occupation is one of the important factors taken into consideration while appraising a loan. It is important because repayment capacity depends on the income of the person.

AGE

Age is another criterion that banks look at before giving a loan. To give you an idea, people in the age group of 30-50 years are most preferred as they are considered more financially stable. They also have a decent number of working years left to repay their loans. On the other hand, people above 60 fare the worst in the internal scoring model of banks.

REPAYMENT PERIOD

The shorter the repayment period, the more your bank likes you. For example, several banks give maximum score to people who opt for a repayment period of up to five years. It falls to half if the repayment period is between 10 and 15 years. And it is at the lowest end for those opt for a payment period of 15-20 years. So, the next time, try to shorten your loan period if approval becomes difficult.

RELATIONSHIP WITH THE BANK

The older your relationship with the bank, the higher are your chances of getting the loan approved. Banks value their old customers due to familiarity with the financial past. A person who has been with a bank for more than 10 years is definitely preferred over the one with no previous relationship with the bank.

PURPOSE OF THE LOAN

If the loan application filed by the applicant relates to expansion of business. The bank manager must consider the trend of sales and earning i.e. whether the business has potential to grow after the injuction of further capital. In other words manager should consider whether the sales and earnings has increased over the last three years.

SURPLUS INCOME

Bank Manager should consider whether the balance sheet of applicant is having surplus of profits in the form of retained earnings or reserves. In other words manager should consider whether the business has been successful in the past.

At last to conclude the bank manager should only approve the loan after critically analyze the above factors. Over and above manager should decline the offer of $1000 in any case as it tentamounts to bribe for approving loan which is ethically and legally not acceptable.