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Plugging Holes in Corporate Lending

No bank fails for lack of capital. Unprofitable lending is always the underlying cause.
  • Mar 01, 2021
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#Corporatelending remains more of an art than science. John Maynard Keynes purportedly said that "If you owe the bank 100, that’s your problem; if you owe the bank 100 million, that’s the bank’s problem". Despite every technological advancement and regulatory sophistication, the pareto-optimality in corporate lending is often the subject of risk appetite of individual #bankers on one side and the ulterior motive of the borrower on the other.

Management of banks are responsible for ensuring presence of appropriate credit risk assessment processes and effective internal controls commensurate with the size, nature and complexity of its lending operations to consistently determine provisions for loan losses in accordance with regulatory requirements.

The challenges result from:

  • Corporate clients often do not provide real information
  • Account Managers (AM) can be too aggressive in taking risk
  • Credit Risk managers can be too conservative due to lack of good grasp of the business
  • Information asymmetry may have a negative impact both on banks and companies
  • Open to malpractices to get sanctioned and monitor loans
  • Opacities and breakdown in communication lead to distrust and fear that snowballs into bigger problems
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