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The Credit Department

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THE CREDIT DEPARTMENT General Functions of the Credit Department When an application is made for a loan or discount the banker must decide: (i) upon the desirability of the applicant as a customer of the bank, (2) upon the probable willingness and ability of the applicant to repay according to the terms agreed upon, and (3) upon the security or protection which the applicant offers the bank against default. Certain applicants are favorably received because it is believed that they will not only add to the profits but also to the prestige of the bank; others are refused because of their bad financial records and business reputations. A bank which specializes in, say, cattle loans may refuse appli cations for cereal loans. Many factors, such as character, reputa tion, line of business, domicile, etc., determine the banker's atti tude toward the applicant. The question of willingness and ability to repay depend upon the business ability, integrity, and capital of the applicant, the nature and possibilities of his line of business, and the special conditions attending the ventures in which he is engaged. If he offers commercial paper for discount, the same information must be known about the makers of those instruments as about himself. To assemble information of this sort and put it into useful form the banker employs a credit department.

With respect to security, loans are of two sorts, unsecured and secured or collateral. Unsecured loans are made on the mere written promise of the borrower to repay at maturity. Such promises have value in proportion to his character, capital, and capacity—the three C's of credits. Data for estimating these elements are assembled and digested by the credit department, and the final estimates of them are made by the proper officers of the bank.

Promises to repay may be reinforced by pledges of value, the right to which passes to the creditor upon default of the borrower to repay according to the agreed terms of the promise. Loans evidenced by a contract secured by pledged property are called " collateral" loans. The pledged article may be: (I) actual wealth, as jewels, or (2) titles to wealth, as warehouse receipts, or (3) credits, as bonds or commercial papers. The problem of the bank in the case of collateral loans is less an estimation of the character, capital, and capacity of the borrower and more an estimation of the value of the securities pledged; but the credit of the borrower is carefully weighed before loans are extended even on collateral, the first essential when a man borrows money or seeks credit being a good business character. If the collateral consists of commercial

paper, the names of the makers and indorsers upon this paper must be as carefully investigated as are those of borrowers on unsecured notes.

Need for Credit Department The credit department is a necessary part of bank organiza tion when the bank's business extends beyond the known local community. In banks doing a local business only, the officers are chosen with a view to their intimate knowledge of the financial conditions and business relations of their fellow-townsmen; it is quite possible for the officers to know local conditions and bor rowers well enough to protect the bank. It is also possible for the local bank to depend upon the credit service of its metropolitan correspondent. But the expansion of banking operations from a local to a regional or national sphere has necessitated the assem bling and classifying of credit information for the district covered. The very size of the bank and its field of operations has created a need for more credit information than any group of officers could personally acquire and retain in their heads, and hence a bureau to gather, classify, digest, and make useful such information has become indispensable.

The credit department, as it is now understood, is a recent development in banking. Such departments were first organized about 189o; they started in New York, and up to 19oo were con fined to that city. After 190o they spread to the other large cities quite rapidly. The volume and importance of their work also increased, and they now pursue more scientific and complete methods in the assembly and analysis of credit data. The re quiring of financial statements from borrowers, by which the bank might estimate the credit of the borrower, arose during the years of recovery from the panic of 1893, and the intervening years have not altogether eradicated the idea that a request for such a statement reflects on the borrower's credit. Gradually, however, borrowers are learning that co-operation with their bank's credit department is a wise business policy, and the credit department is fast becoming one of the most important divisions of the bank.

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