A loan scorecard is a special tool that helps banks in determining their overall performance. This features key performance indicators (KPIs) that measure performance levels in certain aspects of bank operations.
Providing loans is one of the most important functions of financial institutions, like banks. While this may be the case, it is also important for them to ensure that their loans are performing well. That is, their debtors, or the people or entities who borrow from them, are able to settle their financial obligations promptly. It is for this reason that many banks develop scorecards that will evaluate their loan performance. Liquidity ratios are often integrated into the scorecard. Usually, two to three liquidity ratios are used.
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The amount of uninvested funds of the bank is another aspect that is usually included in a loan evaluation tool. This is to ensure that the financial institution is able to comply with the reserve requirements set by the Federal Reserve Commission. Thirdly, a loan commitment table is integrated into the scorecard. This contains such pieces of relevant information as beginning and maturity period of existing loans, new loans, and other current funded commitments. This table will allow bank management to get a quick glimpse about how the bank is faring in terms of productive loans. Moreover, it will allow the managers to easily forecast future borrowing trends. In addition, information on outstanding loans also needs to be integrated in tables and graphs, as they may drastically affect the bank's profitability.
Scorecard on loan portfolios also is a reflection of how efficient and effective credit evaluation measures have been. Credit evaluation needs to be done before a loan could be approved.
In credit evaluation, there are five Cs that every potential debtor should be aware of. These are character, credit report, capacity, cash flow, and collateral. These five factors spell the difference between an approved loan and the rejected loan application. The character of a loan applicant is assessed through a lifestyle check or an interview. A person with sound and reliable characteristics has a bigger chance of being granted a loan compared to a person who is not doing well with his finances as delayed loan payments in the past. Credit report or credit history, on the other hand, contains all relevant information about an individuals borrowing and payment transactions. Businesses and financial institutes rely on reports furnished by credit bureaus to obtain this data. Creditors also need to check the capacity of a loan applicant to pay by looking at the bank accounts maintained. Lastly, a loan applicant's ability to secure collateral will also increase his chances of loan approval.
Aside from being a useful tool in providing information with regards to loan performance, a scorecard can also be used to measure and minimize credit risk, or the risk of loss due to a debtor's inability to pay a loan or a line of credit. In fact, some software companies have come up with loan scorecard applications to help financial institutions in loan approval decisions.
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