Asset Quality Of Banks And Financial Institutions- Introduction

Published by slang April 25th, 2007 in Banks/Finan.Institutions, Ratio Analysis

One of the fundamental reasons for a bank/financial institution to collapse is its poor asset quality namely giving out bad or poor credit standard loans Not even foreign exchange exposure, deposits, maturity mismatches and open positions can hit it so hard to cause a bank/financial institution to collapse ! When a bank/financial institution get too aggressive with its lending policy, it might get saddled with questionable loans. So can we name those questionable loans? This includes the following:

Bad loans can accumulate when loans are given to owners or insiders far in excess of their entitlement or ability to repay or on the basis of misrepresentations made.
Loans that the financiers are not prudent to see that they are lending to companies that have bad management and understated liabilities
Loans to companies that experience certain industry downturns
Loans given to politicians and high powered figures

So how do we examine poor asset quality/bad loans: the following are suggested:-

· Reviewing critically the number of loans given to directors or others connected with the bank or to companies or business in which the directors or the management have an interest.

· Determining whether loans have been given to politicians, bureaucrats or politically motivated reasons.

· Breaking down loans to industries or to geographical areas. In times of recession, a concentration of loans to an industry undergoing a difficult period would be potentially dangerous

In the forthcoming articles, we shall look at some Financial Ratios to assess the Asset Quality of Banks and or Financial Institutions

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