Lending products

From Open Risk Manual

Definition

Lending products are any of the wide variety of bilateral credit products that are offered by private or public banking firms and institutions.

  • Credit Cards
  • Car Loans
  • Mortgages
  • Consumer Loans
  • Commercial Loans
  • Corporate Loans


Lending is the principal business activity for most commercial banks. The loan portfolio is typically the largest asset and the predominate source of revenue.[1]

Lending Product Characteristics

Lending products come in many variations. Some of the key dimensions differentiating products are

  • Maturity: From very short term (e.g. trade finance) to very long term (e.g., project finance)
  • Floating / fixed rate: The manner in which interest rate payments are computed
  • Currency: The currency in which the loan is denominated (if different from the unit used in the borrower's domicile)
  • Secured / Unsecured: The degree to which the borrower pledges assets as collateral to the loan
  • Recourse / Non recourse: Whether or not the lender has recourse to the borrower's other assets
  • Funded versus Contingent: Whether the funds are disbursed immediately or simply made available at the borrowers discretion (e.g. a credit line). In the later case there is typically an agreed limit.
  • Prepayment clauses: Whether the borrower can repay the loan at their discretion and what prepayment penalties may apply.

Further Differentiation

The lending product may involve a large number of additional clauses depending on the borrower, the intended use of funds, and risk management policies of the lender.

  • Ability to renegotiate rates
  • Restrictions in the use of funds
  • Restrictions on further borrowing
  • Acceleration triggers (requiring immediate repayment in certain circumstances)

Issues and Challenges

  • All lending products involve Credit Risk, the assessment and management of which is a major discipline
  • Complex lending products maybe difficult to understand and manage.

References

  1. Loan Portfolio Management Comptroller’s Handbook, April 1998 (Updated June 26, 2017, for Non-accrual Status)

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