Name Lending: A poor form of credit risk management

We all know what name lending is what goes behind the scenes to sanction a term loan to a large corporate that is well known in the market. But is it good risk management practice.

We, at Riskpro, believe that it is a poor form of risk management mainly because it is not an informed decision at all. There is no background check, no reasoning for the type of facility, the collateral, pricing etc. It is more of lending to enhance one’s reputation / brand to be associated with a big name as well as trying to gain that small basis point edge over borrowed money. All this in the faith that the borrower of that large size can never default.

But, recent history has shown that even the biggest names have failed. A rule of thumb is that profits from 100 good loans can be wiped away from one single bad loan, all loans being of equal size. So, if Satyam was considered too large to fail, and lenders had bet big on Satyam, then they lost out a great amount.

Name lending approach should be reserved for a few large tickets and maybe as a filtering process to evaluate which corporate to lend to. The practice should not become a habit and should not be used to override a weak indicator that was discovered as part of the credit evaluation process.

Credit risk management practices and internal audit checks should highlight lending that is not well supported by credit committee decisions, credit evaluation documentation etc. Any gaps in the credit evaluation process will lead to increased bad loans in the future.

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