Downloaded Credit Appraisal Technique
This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Term Lending to Business
Volume Author/Editor: Neil H. Jacoby and Raymond J. Saulnier
Volume Publisher: NBER
Volume ISBN: 0-870-14129-5
Volume URL: http://www.nber.org/books/jaco42-1
Publication Date: 1942
Chapter Title: Practices and Techniques of Term Lending
Chapter Author: Neil H. Jacoby, Raymond J. Saulnier
Chapter URL: http://www.nber.org/chapters/c5754
Chapter pages in book: (p. 73 - 101)
Practices and Techniques of Term
Lending
SINCE THE REPAYMENT of no loan is absolutely certain, pri-
vate credit institutions cannot avoid measuring the risks of lending, nor can they avoid adopting a policy regarding the amount of risk they are willing to assume. As a practical matter, this involves, first, the adoption of credit standards by reference to which applications for loans may be tested, and second, the use of credit appraisal methods in order to determine whether requests for loans meet these standards.1
Commercial banks, life insurance companies, and public agencies extending medium-term credit to business concerns have gradually developed specially trained personnel and unique credit standards, along with methods of appraising and limiting term loan risks. The factors that determine the probability of repayment of a term loan differ markedly from those pertaining to a personal loan, a residential mortgage or other forms of credit. Moreover, the large size of individual term loans means that lenders cannot rely upon diversification to any considerable extent to limit their risks, but must attempt to compensate for this by the care with which they scrutinize each loan application.
Organization and Personnel
Very few commercial banks have set up separate departments or divisions charged with the functions of making and controlling all term loans originating in the bank.2
It may also entail the provision of
Bureau of Economic Research
Volume Title: Term Lending to Business
Volume Author/Editor: Neil H. Jacoby and Raymond J. Saulnier
Volume Publisher: NBER
Volume ISBN: 0-870-14129-5
Volume URL: http://www.nber.org/books/jaco42-1
Publication Date: 1942
Chapter Title: Practices and Techniques of Term Lending
Chapter Author: Neil H. Jacoby, Raymond J. Saulnier
Chapter URL: http://www.nber.org/chapters/c5754
Chapter pages in book: (p. 73 - 101)
Practices and Techniques of Term
Lending
SINCE THE REPAYMENT of no loan is absolutely certain, pri-
vate credit institutions cannot avoid measuring the risks of lending, nor can they avoid adopting a policy regarding the amount of risk they are willing to assume. As a practical matter, this involves, first, the adoption of credit standards by reference to which applications for loans may be tested, and second, the use of credit appraisal methods in order to determine whether requests for loans meet these standards.1
Commercial banks, life insurance companies, and public agencies extending medium-term credit to business concerns have gradually developed specially trained personnel and unique credit standards, along with methods of appraising and limiting term loan risks. The factors that determine the probability of repayment of a term loan differ markedly from those pertaining to a personal loan, a residential mortgage or other forms of credit. Moreover, the large size of individual term loans means that lenders cannot rely upon diversification to any considerable extent to limit their risks, but must attempt to compensate for this by the care with which they scrutinize each loan application.
Organization and Personnel
Very few commercial banks have set up separate departments or divisions charged with the functions of making and controlling all term loans originating in the bank.2
It may also entail the provision of