Credit and Lending Operations
Scope
Credit and Lending Operations tests the full credit cycle: appraisal, sanction, documentation, disbursement, monitoring, classification, provisioning, and recovery. Questions often turn on whether a control happened before or after disbursement.
Core rules
- Appraisal uses the 5 Cs (character, capacity, capital, collateral, conditions), plus eCIB/CIB report, financial analysis, and repayment source. Collateral is a secondary source of repayment, not the primary one.
- Sanction is a credit approval authority; disbursement must follow documentation, charge creation, and limit setup. For companies, charge registration with SECP and search reports matter.
- Security types: hypothecation (movable assets, possession with borrower), pledge (possession with bank), mortgage (immovable property), lien, and guarantee.
- SBP Prudential Regulations govern classification and provisioning. Overdue principal/interest triggers classification; provisioning is charged to profit and loss.
- Restructuring/rescheduling must be based on viability, not used to hide delinquency; upgrades require sustained performance.
Worked example
A borrower has PKR 100 million outstanding and is classified Substandard. Under the applicable SBP provisioning rate of 25%, the bank must hold PKR 25 million provision. If the borrower later pays only overdue interest, the account should not be upgraded automatically; classification depends on overdue principal/interest and the PR criteria, and the provision remains until the account qualifies for upgrade. Reasoning: repayment of one overdue item does not cure the whole exposure.
Traps
- Disbursing before security documentation and limit setup.
- Assuming collateral eliminates the need for provisioning.
- Writing off a loan without approval and recovery follow-up.
- Ignoring eCIB and related-party exposure.