International Journal of Innovative Research and Development

Abstract

The biggest risk faced by commercial banks is the credit risk, which is associated with the uncertainty of borrowers default to pay the loan amount. It is the obligation of bankers to adopt the effective credit approval and appraisal mechanism while granting the loan. It involves evaluation of borrowers’ current and future ability to fulfill its interest and principal repayment. The bankers should act pro-actively in administering credit approval and appraisal system. For this Loan Review Mechanism can be used as an effective tool aiming to cover the entire portfolio of credit and credit cycle starting from the documentation process, sanctioning of loan, disbursement, grading, monitoring the post sanction of loan and problem of recovery. Bankers should have through knowledge of prudential norms and Basel accord guidelines on credit risk in managing and administering of loan review mechanism. In this process of Loan Review Mechanism identifying and assessing the credit quality and timely credit grading of loan portfolio forms the basic components in effective credit approval and appraisal system. Hence the Loan Review Mechanism can be termed as a key factor in determining the soundness and financial health of banks. The present study is based on secondary data gathered and reviewed from previous studies, guidelines given by RBI, Prudential norms and Basel accord guidelines. It aims at understanding the concept of credit risk, need of credit approval and appraisal system, rationale in administering Loan Review Mechanism of commercial banks and to suggest the measures to be adopted by bankers in mitigating their losses caused due to loan assets.

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