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The Development Of The Loan Scorecard

Apr 8, 2008
KPIs or key performance indicators are important to have in just about any industry. This is because these KPIs greatly assist in determining the overall performance of any company. In the industry of banking, KPIs are also very much needed in determining the particular level of performance of the bank in question. The KPIs here can be financial or non-financial. Whatever type of KPIs used, the important thing here is that they should suit the strategies, objectives, and the organizational framework of the bank in question. Also, if there is one thing to know about KPIs in the bank industry, it is that they can vary from one financial institution to another. This is because the management approaches undertaken by these banks can also vary.

The bank is a financial institution that is very reliable when it comes to funding loans. In fact, a lot of people turn to banks to apply for loans and such. This is precisely why banks also have to formulate for themselves loan scorecards that they can use, to ensure the effectiveness of banks in funding loans. But just like any other scorecard, there are aspects to consider when developing a loan scorecard. This way, the resultant scorecard will be as balanced as it should be. Here are some of the things to consider when developing the loan scorecard.

The first aspect involves the bank's liquidity ratios. It is actually recommended to consider the settlement of one or two of the liquidity ratios. There are actually twelve in all. With the settlement of just one or two, dealing with these liquidity issues can then be made easier. This is very important because these liquidity issues actually affect the overall performance of the bank. Thus, this should be considered when developing the loan scorecard.

The second aspect should involve the bank's uninvested funds. When the bank's reserve requirements have been taken out of the equation, it is actually the bank's uninvested funds that help quantify the performance of the bank's funding state. This measurement is very much needed when considering the institution's funding, especially when undergoing certain investments.

The third aspect involves the development of what is known as a loan commitment table as well. The table should contain the beginning period of existing loans, the new loans, the funded commitments at present, and the ending balance of the existing and new loans. The development of a loan commitment table shows strong indications on the future obligations as well as the movement of the bank itself. There should also be average rates included for each of the categories. The average rates will show the prospect just how they would affect the upcoming loan gains.

A graph of loans outstanding should also be demonstrated. The following categories should be included in the graph: the beginning of the phase, the newly funded loans, the principal reductions, and the total ending loans. These categories give strong indication on how loan activities are going. The loan portfolio's average rate at both the period's beginning and end should also be inspected. This way, profitability information can be shown.

These are just some of the aspects that should be considered when developing the loan scorecard. This way, profitability can be maximized in all aspects.
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