Precise and prompt credit grading is a key component of an effective loan review system. Credit grading involves an evaluation of credit quality, the recognition of problem loans, and the task of risk ratings.
Credit grading often places dependence on loan officers for recognizing emerging credit problems. However, given the importance and essence of credit grading, a loan officer’s judgement should be subject to review. Reviews may be performed by peers, superiors, committees, or other internal or external loan review specialists.
Grading performed by individuals sufficient of the lending function are preferred because they often can provide a more objective assessment of credit quality. A successful credit grading system involves:
- A traditional credit grading system that can be restored with the framework used by the bank’s regulators.
- A recognition of loans or loan pools that warrant special attention.
- A procedure for reporting identified loans to senior management and the board of directors.