Lending by banks

The increasing tightening of bank lending is forcing consumers and entrepreneurs to make a change in thinking and acting. But in order to provide a good counterbalance, one must first have insight into the bank’s internal decision-making.

What is the credit acceptance process?

Do you know who at your bank decides on your loan application, how the decision-making process takes place, which criteria are decisive and what room for maneuver there is? For the hurried reader, the most important things in brief:

  • Credit competencies are usually arranged separately at banks. Your point of contact is not always the person who makes the decision. From a certain size/volume, the approval of a superior, a proxy holder or even the exchange is required;
  • creditworthiness and collateral are the most important criteria when granting credit;
  • Banks are subject to strict legal requirements and internal regulations when granting loans. Correct compliance with this is closely monitored;
  • in addition, the loan officer must keep a close eye on the bank’s business policy objectives;
  • Automated data processing plays an important role in credit decisions. The decision-making process is becoming increasingly standardized;
  • Even after a loan has been granted, creditworthiness and collateral are continuously monitored on the basis of submitted figures, etc.

Who makes the decision in the credit acceptance procedure?

Credit authorities are regulated differently depending on the type of credit institution:

  • Local savings banks and cooperative banks are often legally independent entities that can make all credit decisions themselves. Only for larger amounts of credit does the management or supervisory board have to agree;
  • Commercial banks, on the other hand, usually deal with a branch, which can only handle credit decisions locally up to a certain size, while for higher loan amounts a central decision is made.

Your bank advisor is not always the one who decides

Your bank advisor or point of contact at the bank is not always the person who makes decisions about your credit applications. Especially for higher loan amounts, he/she will have to obtain approval from his or her manager or request the approval of another authorized official.

Creditworthiness and securities

Whether and under what conditions the bank will grant a loan, or perhaps even limit an existing credit facility, depends largely on whether, in the bank’s opinion, you will be able to pay the agreed interest and repayments. Only if you are able to meet your financial obligations is there a responsible credit risk for the bank. The bank assesses your future financial capacity based on the performance of you or your company, both past and present, and the prospects for the future, in short, your creditworthiness. And in case you or your company performs worse than expected and the required debt service cannot be provided, banks require additional collateral (collateral, surety), which they can then monetize. They can use the proceeds to reduce the risk of credit default.

How can you negotiate more favorable terms?

Creditworthiness and collateral are therefore the decisive factors in lending. However, low collateral can be offset to some extent by good credit and vice versa. This also means that by improving your creditworthiness you need less collateral or, if the collateral remains the same, you fall into a better risk class and can therefore negotiate better conditions.