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It is obvious that every bank must have an independent department that deals with the credit function. There is, however, no organizational model which is right for every bank. Different market conditions or cost structures may require different organizational solutions.

1. Functions performed by the credit department

The following functions must be performed in order to establish an efficiency credit process. While some can only be executed by a central credit department, others can be delegated to regional credit analysts or to account managers:

Function	Credit central	Departm. regional	Account Manager
establish a general credit policy	x
credit portfolio planning and control	x	x
set overall and specific credit limits	x
perform credit reviews	x
manage problematic exposures	x	x	x
delegate credit authorization	x	x
analyze new loan requests (dependent on amount of loan)	x	x	x
decide on credit facilities (dependent on amount)	x	x	x
monitor credit facilities	x	x
provide industry analysis	x	x
report to bank supervisory agencies	x
advice on profit margins	x
liaise with treasury, economic and other central departments	x
credit documentation and administration		x	x
administration of collateral		x	x

A clear and effective segregation of duties must be maintained to ensure that persons who evaluate and authorize credit transactions are not responsible for the disbursement and receipt of funds or the recording of transactions in the books of account.

2. Credit organization: Concentration versus decentralization

There are a number of factors to consider when determining which type of credit department is best for a bank:

—          The products offered by the bank influence its organizational structure. Banks that are specialized in complex forms of credits would favour a centralized credit function with specialists who are experts in their respective fields, for example structured finance, big ticket leasing or inventory finance. Banks, which operate in the lower risk credit areas and offer commodity financing products to broader markets, tend to pass down the credit decision to the branch level or even to the account managers.

—          The profile of the bank’s credit portfolio has an important bearing on the credit department. Banks with a small number of highly material credits will prefer a centralized credit function, whilst a loan portfolio with a large number of smaller credits can be better managed and controlled by a decentralized regional structure.

—          The size of the bank and its geographical dispersion: small banks with only a handful of credit specialists have no other choice but centralizing the credit decisions. Large international banks with hundreds of experts may have lots of regional credit departments acting in a relatively independent way. Head office must set clear guidelines to ensure that a coherent credit policy is observed throughout all the banks branches.

—          Finally, the credit culture and the tradition of the bank affect the way its credit function is regulated. In recent years there has been a trend to provide operational units with the right to make more credit decisions within a certain limit at operational level, which is sometimes viewed as a breach with long-standing traditions.

With a total centralized structure, all the credit functions of the credit department would be carried out by head office. Regional branches or account managers could only submit credit requests. Some advantages and disadvantages of a centralized credit department are as follows:

Centralized credit department:

Advantages	Disadvantages
economies of scale concentration of expertise fewer personnel required compliance with credit policy is easier to control	local credit functions are relieved of credit responsibility remoteness from corporate client less responsive to local market conditions more bureaucracy, longer processing time

On the other hand, a decentralized credit risk organizational structure would mean that all the main tasks associated with the credit function are executed in each individual local operational group. These tasks include the assessment, authorization and monitoring of credit risks. The local staff must be highly qualified, which requires systematic training. Besides deciding the really big loan requests, the credit team at head office mainly has to ensure that the credit policy and procedures are properly followed.

Decentralized credit department:

Advantages	Disadvantages
local autonomy and responsibility entrepreneurial initiative reduced processing times closer to the customer and to local markets less reporting to head office less bureaucracy	sophisticated controlling and risk monitoring systems required more credit personnel required less consistency greater risk of insufficient control

3. Documentation

Often banks take great efforts to develop and decide on their credit organizational structures, their credit process and risk management tools, but they tend to neglect to ensure that these are regularly and effectively used in daily work. It is essential, however, that these internal regulations are reflected in the credit files. Proper documentation is a prerogative for maintaining a sound credit business. Documentation on when and how the creditworthiness of each customer has been assessed is strictly required by law. Reality, however, often does not measure up to this: according to a study by the international consulting firm McKinsey, 20 to 30 percent of the loans made by European banks lack proper documentation and fail to follow the procedures outlined in bank policy.

A typical credit file contains at least:

— credit authorizations:	— counterparty — amount of credit — purpose of credit — repayment sources — collateral — compliance with credit portfolio planning — evidence of credit department approval
— Financial analysis:	— up-to-date audited financial statements of counterparty — balance sheet and P&L spreads — SWOT-analysis — cash flow analysis — financial forecasts — assessment of management quality — account data analysis
— valuation data:	— status of collateral — valuations of values, especially with real-estate financing — security margins
— correspondence with client
— legal documentation

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