Loan Review Mechanism/Credit Audit in Banks
Loan review is a process of periodically assessing the quality of a bank’s loan portfolio. It is an essential part of risk management, as it helps to identify and mitigate potential problems before they become serious.
There are two main types of loan review:
- Credit audit: This is a detailed examination of individual loans, typically conducted by external auditors.
- Loan monitoring: This is a more general review of the loan portfolio, typically conducted by internal staff.
Both credit audit and loan monitoring are important, but they serve different purposes. Credit audit is more focused on identifying individual problems, while loan monitoring is more focused on identifying trends and patterns.
The loan review mechanism in banks is typically overseen by a dedicated department, such as the credit risk management department. This department is responsible for developing and implementing the loan review process, as well as for communicating the results of the review to senior management.
The loan review process typically involves the following steps:
- Selecting loans for review: The first step is to select loans for review. This is usually done on a risk-based basis, with loans that are considered to be more risky being reviewed more frequently.
- Gathering information: Once the loans have been selected, the next step is to gather information about them. This information can include the loan agreement, financial statements, and other relevant documentation.
- Analyzing the information: The information that has been gathered is then analyzed to assess the quality of the loan. This analysis will typically consider factors such as the borrower’s financial condition, the collateral, and the terms of the loan.
- Reporting the results: The results of the loan review are then reported to senior management. This report will typically identify any problems with the loan and make recommendations for corrective action.
MCQs on Loan Review Mechanism/Credit Audit in Banks
- Which of the following is not a type of loan review?
- A. Credit audit
- B. Loan monitoring
- C. Loan appraisal
- D. Loan supervision
The correct answer is (c). Loan appraisal is the process of assessing the creditworthiness of a borrower, before a loan is made. It is not a type of loan review.
- Which of the following is the most important purpose of loan review?
- A. To identify individual problems
- B. To identify trends and patterns
- C. To improve the quality of the loan portfolio
- D. To comply with regulatory requirements
The correct answer is (a). The most important purpose of loan review is to identify individual problems. This is because early identification of problems can help to prevent them from becoming serious.
- Who is responsible for overseeing the loan review mechanism in banks?
- A. The credit risk management department
- B. The loan portfolio management department
- C. The audit committee
- D. The board of directors
The correct answer is (a). The credit risk management department is responsible for overseeing the loan review mechanism in banks. This is because the credit risk management department is responsible for managing the overall risk of the bank’s loan portfolio.
- Which of the following is not a step in the loan review process?
- A. Selecting loans for review
- B. Gathering information
- C. Analyzing the information
- D. Approving the loan
The correct answer is (d). Approving the loan is a step in the loan origination process, not the loan review process.
- What is the purpose of loan monitoring?
Loan monitoring is a process of periodically reviewing the loan portfolio to identify trends and patterns. This helps to ensure that the loan portfolio is managed effectively and that any potential problems are identified early.