Banking Exam Question - What is Loan Portfolio Management? Explain it's Objectives & Various stages of Loan Portfolio Management

Loan Portfolio Management

Portfolio management is a tool for managing risk inherent in business. it is guided by the arguement "Do not put all the eggs in a single basket." it illustrate that more diversified your business less you are exposed to risk. On the other hand more diversified your business, more complex to manage risk.

• Portfolio is a set of assets owned by a person or company.
• It is rate to find financial institutions investing their entire resources.
• The role of portfolio management is managing the credit risk. 
• In the context of bank portfolio refers to the bank's investment.
• The portfolio management is the dynamic function of evaluating and revising the loan portfolio in terms of stated investor's objective.
• The portfolio helps to reduce credit risk without sacrificing return.
• Loan portfolio analysis considers determination of future risk return in undertaking various activities.

Objectives

1. Manage and diversify credit risk
2. Utilize resources to the optimum level
3. Mobilize resources in balanced way
4. Make quality lending and timely collection
5. Maximize profit
6. Make institution finally viable

Various stages of Loan Portfolio Management

Loan portfolio management is a process encompassing many lending activities aimed at optimizing the investment of one's resources, some stages of loan portfolio management are as follow.

1) Portfolio Analysis:

the objectives of portfolio analysis is to asses how well the investment plan in meeting its goal as well as the degree to which investment is adding value in carrying out investment plan.

2) Portfolio selection:

Portfolio analysis provides the input for portfolio selection. Best portfolio must be chosen. The optimal portfolio has to be selected for investment. 

3) Portfolio revision:

Portfolio revision involves changing the existing mix of credit activities. The objective of loan portfolio revision is maximizing the return for a given level of credit risk. The loan portfolio revision is the process of adjusting the existing loan portfolio in accordance with the change in financial market.

4) Portfolio Evaluation:

Evaluation is an appraisal of performance, portfolio evaluation refers to the evaluation of the performance of the portfolio. It is the comparison of the return earned by a portfolio with the other portfolio or benchmark portfolio.