Lending Policy is one of the primary services of a bank.

Students are required to analyze the lending policy and

critically discuss its different steps.

Subject : Credit Management

Code # : 5544

Semester : Autumn 09

Submitted To : Mr. Muhammad Mansha

 IN THE NAME OF ALLAH
The COMPASSIONATE, THE MERCIFUL
 DEDICATION

I DEDICATE MY WORK TO MY
PARENTS
&
TEACHERS

Acknowledgements :
In the name of The Lord, Who created man from the clot, and The Lord is
the Most Bounteous, Who taught man that he knew nothing.

Above all I’m indebted to Allah, The Al – Wahab, Who is the Creator and
Provider of everything & His Holy Prophet Muhammad ( P.B.U.H) Whose
Blessings enabled us to perceive and pursue higher ideas of life and Who
conveyed us the Complete and Flawless Teachings.

This project has been completed with the blessings of Almighty Allah,
through countless prayers of my Parents and with my efforts through the
guidance of my elders.

I also acknowledge the valuable time and information which the professional
workers granted me for the completion of this project. There value is second
to none.

I would especially avail this opportunity to thank the following:

Ms. Nusrat Bhatti

OG2, Incharge Advances ,

MCB Bank LTD, Melody Branch,
Islamabad.

Preface:
The topic assigned was a research oriented task which meant that we were to
visit the appropriate organizations for the purpose of data collection relevant
to the issue.

The research which I carried not only increased my knowledge but built my
confidence and I came to know how the work is done professionally, and
also the techniques used to minimize the credit risk. The issue which was
assigned to me was “Techniques to minimize the Credit Risk” and for my
research I chose MCB BANK LTD.

For the completion of my task, I visited to Advances department and studied

the precautions they opt while lending credit to individuals, businesses etc.

This research has been done with my continuous and dedicated efforts.

The practical study highlights the techniques to minimize the credit risk.
Some recommendations are also included in my report.
INTRODUCTION AND BACKGROUND:

Banks do not make money the way everyone else does. For traditional banks,
the core of the business is simple : the bank earns money on the interest paid to
it through loans, which is at a higher rate than the interest it pays to the
depositors. The spread between these two rates is where the bulk of revenues
come from. Because it is a pain for people and businesses to switch bank
accounts, many banks also make incremental revenue by charging fees to
customers (like ATM fees, maintenance fees, overdraft fees, etc). Since banking
is not capital intensive in a building-and-equipment sense, the cash flow
generated can be put back to work into more loans, which leads to more interest
spread income.

Investment banks are somewhat different. While most have a traditional banking
arm, these banks earn the majority of their revenues by helping businesses raise
capital by underwriting debt (usually through bonds) , advising on business
transactions, and buying and repackaging securities

The role of commercial banking is to fill the diverse desires of both the borrowers
and lenders in our economy. Banks are financial intermediaries that supply
financial services to surplus and deficit units of the economy. Most of bank’s
assets are financial in nature such as the amount borrowed by households,
businesses, government agencies etc. Banks liabilities are also financial in
nature primarily being the deposits kept by households, businesses, government
agencies etc. The assets and liabilities of a bank are channeled i.e. the liabilities
(major deposits) are used to enhance the bank’s assets. In other words a bank
uses the deposits of the bank to issue loans to households; businesses etc and
earn a return on them. Bank’s also raise capital from the sale of stock or the
accumulation of retained earnings but generally represent a relatively minor
source of funds. (rumelt, 1977 and Anderson and paine, 1975).
Are banks special intermediaries? Do they play any unique role in the economy?
And if so, will they retain their specialty in the ever faster changing world of
finance? The rapid evolution of finance over the last two decades and the
breathtaking ‘e-age’ revolution have persuaded many that, eventually banks will
be indistinguishable from other financial intermediaries since all their functions
can at least be efficiently be carried out by non-banks. (Bossone, 2001).Initially
commercial banks were viewed as a totally separate entity as compared to other
financial and non-financial organizations like investment banks but times have
changed and now commercial banks most obviously have to compete with other
types of banks, financial intermediaries, and with any organization that wishes to
perform the task of filling the diverse desires of surplus and deficit units in the
economy. (Maier, 1963 and Nutt, 1976). Most bankers believe that the defining
business of banking is lending. Recent history has shown how critical it is for
banks to control their risks of lending. Poor loan quality was the main factor in the
growing number of bank failures in our economy. The most basic faults in lending
procedures are

1. Inattention to loan policies

2. Overly generous loan terms and lack of clear standards
3. Disregard of the banks own policies
4. Unsafe concentration of credit
5. Poor control over loan personnel
6. Loan growth over the bank’s ability to control quality
7. Poor systems for detecting loan problems
8. Lack of understanding of borrower’s cash needs
9. Out of market lending