Volume Title: Term Lending to Business
Volume Author/Editor: Neil H. Jacoby and Raymond J. Saulnier Volume Publisher: NBER
Volume ISBN: 0-870-14129-5
Volume URL: http://www.nber.org/books/jaco42-1
Publication Date: 1942
Chapter Title: Practices and Techniques of Term Lending
Chapter Author: Neil H. Jacoby, Raymond J. Saulnier
Chapter URL: http://www.nber.org/chapters/c5754
Chapter pages in book: (p. 73 - 101)
Practices and Techniques of Term
SINCE THE REPAYMENT of no loan is absolutely certain, pri-
vate credit institutions cannot avoid measuring the risks of lending, nor can they avoid adopting a policy regarding the
amount of risk they are willing to assume. As a practical matter, this involves, first, the adoption of credit standards by reference to which applications for loans may be tested, and second, the use of credit appraisal methods in order to determine whether requests for loans meet these standards.1 Commercial banks, life insurance companies, and public
agencies extending medium-term credit to business concerns
have gradually developed specially trained personnel and
unique credit standards, along with methods of appraising
and limiting term loan risks. The factors that determine the probability of repayment of a term loan differ markedly from those pertaining to a personal loan, a residential mortgage or other forms of credit. Moreover, the large size of individual term loans means that lenders cannot rely upon diversification to any considerable extent to limit their risks, but must attempt to compensate for this by the care with which they
scrutinize each loan application.
Organization and Personnel
Very few commercial banks have set up separate departments or divisions charged with the functions of
making and controlling all term loans originating in the bank.2 It may also entail the provision of reserves, set aside out of income from
loans, against which "normal" losses may be charged.
Among a large number of banks located in leading financial centers east of the Mississippi River, whose officers were interviewed by the writers, only one had concentrated all term lending functions in a separate department.
Term Lending to Business
A number of banks have approximated this form of organization by placing a senior officer in charge of all term credits,
with the duty of supervising and passing upon term loans
originating with other officers. But the majority of American
banks that are large enough to have developed a need for
specialization of their business loan functions have divided their territories into geographical areas, one of which is
assigned to each loan officer. A few large banks organize
their business loans on an industrial basis, or combine an industrial with a geographical basis of organization. Whatever method of organization is used, it is generally true that applicants for term loans and seasonal loans will deal with the
same loan officer. In short, banks have preferred to adapt
their existing organizations to term lending rather than to
create new divisions.
This fact does not indicate that bank managements fail to
recognize any peculiarity in the credit problems posed by term loans. Many institutions have created special statistical or re-
search departments for the analysis of applications for term loans. It is significant that in some cases these credit analyses are assigned to the analytical units connected with the bond or
trust departments of the bank, rather than to the regular
credit department.3 This is evidence of a recognition that term loans should be judged by standards and analyzed by methods
appropriate to investments rather than to short-term loans.
As may be inferred from the general absence of special
organization for term lending by commercial banks, the personnel engaged...