What is the main purpose of a loan review process?

The main purpose of a loan review process is to assess the quality of a bank’s loan portfolio and identify potential issues. This process is crucial for maintaining the overall health of the bank’s financial standing, as it helps in evaluating whether loans are being repaid as expected and if any borrowers are at risk of default. By systematically reviewing loans, banks can identify weaknesses in their lending practices, understand the risk associated with their loan books, and implement strategies for mitigating those risks.

Effective loan review processes enable banks to maintain a strong loan quality, optimize their credit policies, and ensure compliance with regulatory requirements. This helps in safeguarding the bank's assets, enhancing profitability, and ultimately contributing to the stability of the financial institution. Understanding this aspect underscores the importance of proactive management in the lending process rather than reactive measures to defaulted loans.