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
- Construction Loans
- 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.
The concept of a lending product is broader than a Loan Product. The main difference is the additional contractual flexibility offered by products such as credit cards, credit facilities and other types of Revolving Credit
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
- Amortization Schedule: The repayment schedule for principal and/or interest payments
- 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.
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.
- Loan Portfolio Management Comptroller’s Handbook, April 1998 (Updated June 26, 2017, for Non-accrual Status)