CHAPTER XIX

ORGANIZATION AND OPERATION OF A BANK CREDIT DEPARTMENT

It should be emphasized at the outset that the type of organization of a bank credit department must necessarily vary with the size and character of the institution and the nature of the community it serves. There are banks in which two or three officers together with a discount committee perform all the necessary functions. On the other extreme, there are to be found some of the largest banking houses with as many as a hundred officers and in which the work is highly departmentized. In such institutions the credit department is in charge of a credit manager, who may rank as vice-president or assistant cashier. Between these two extremes there are a large number of mediumsized banks located in growing communities where the executive officers sooner or later reach a point where they find it impossible to maintain a personal and immediate contact with all customers whose names are carried on the books.

In order to overcome these difficulties and to assist them to keep in touch with borrowing customers, such banks generally conclude that the installation of a credit department, which will gather and file all valuable information and make it readily available as occasions arise, will solve their problems. Thus, it is not unlikely that the number of credit departments in banking institutions will be greatly increased as the communities whose needs they serve grow and develop and as progress is made in the size and number of accounts handled. The raison d'être of every bank credit department is invariably found in the need of the loaning officers for assistance in assembling and interpreting facts and opinions that will help them to determine intelligently whether or no credit should be extended, and in what amounts.

It is not intended to make the exposition of the organization and operation of a bank credit department so broad as to cover all sorts of banks. An attempt is made rather to explain the

operations of medium-sized and very large credit departments, for it is believed that a comprehension of these two typical organizations will enable every resourceful student of the subject so to modify the mechanical devices and forms to be described as to conform with the needs of the particular bank under advisement.

Control of Bank Loans.-The ultimate source of control is vested in the board of directors. They are required to supervise the work of all their officers, particularly with respect to loans. In some banks they meet once a month or every week, while in others they meet every day. Only important matters are referred to them at their periodic meetings. If the majority of the directors disapprove of the loan under advisement, that decision is final, the opinion of the president and of other officers to the contrary notwithstanding. Since in the majority of banks all the directors do not meet every day, however, it is customary to delegate the loan-making power to a loan and discount committee. This committee is usually composed of three or more members, including the president and two or more other members of the board of directors, among whom are generally included the first and second vice-presidents and cashier. To them all applications for loans exceeding certain stipulated amounts must be submitted at their daily meetings. This committee usually makes a complete report of all applications handled each week or month, as the case may be, and the decisions rendered to the directors under whose supervision it operates.

Next to the loan and discount committee, the president exercises the greatest amount of control over bank credits. All important loans are referred to him by the credit manager for approval or disapproval. Ordinarily, the president does not go into the matter in great detail and acts largely on the recommendations of the junior officers, who analyze the situation with great care. Then follow the vice-presidents, one or more of whom may be placed in charge of certain classes of accounts and who pass upon most credit matters. Where the number of accounts handled is large and the lines of business served are numerous, assistant vice-presidents and assistant cashiers may be engaged in credit work. These officers interview customers and review the financial condition of borrowers with a view to establishing lines of credit, the same as their senior officers,

except that they are likely to handle smaller and, consequently, less important accounts. Finally, the credit manager may have authority to make small loans on good security or those which are otherwise reasonably safe.

CREDIT DEPARTMENTS OF MEDIUM-SIZED BANKS Organization. In every bank of sufficient magnitude to warrant the required outlay, the personnel of the credit department ordinarily includes an assistant to the credit manager and one or more stenographers. It is advantageous to have, in addition, one trained investigator. In nearly all but the very large banks the credit and collection work is handled by one department. Hence, the work naturally divides itself into the major functions of credit investigation and decision, recording, filing, correspondence, and following up accounts.

Functions of the Credit Manager. The credit manager, of course, exercises general supervision of the entire operation of his department. Each day he looks over the new account cards, which are made out simultaneously with the signature card. These cards are sent to the credit department by the clerk at the new account desk. From them, information may be secured concerning accounts opened by new customers, character of accounts, size of deposits, special agreements, if any, and references and affiliations. Upon examining these new account cards he will determine whether or not folders should be made out and investigations instituted concerning those names.

The next function is to interview customers and prospects with a view to securing information sought by the loaning officers as a basis for their decisions. During these interviews he should not only gather information for credit purposes, but must also in every way attempt to cement the friendship between borrowers and the bank, by ascertaining their grievances and complaints, and proceed to smooth them over and remove the causes wherever possible.

Another function is to act as intermediary between the loan and discount committee and his department. From this committee he learns all facts and conditions underlying the granting or refusing of a loan and the position of each individual member when a vote is taken. To obtain these facts, he usually acts in the capacity of secretary, attends all the meetings, and keeps minutes of the proceedings. This enables him to keep in

touch with the policies and wishes of his executive officers and adequately to protect the bank against possible losses.

He then proceeds to dictate replies to credit inquiries from correspondent and other banks and all commercial houses.

Still another function of the credit manager is to go over carefully all financial statements received during the day and indicate by means of marks those portions which are to be transcribed to the comparison of statements form. He then reads all correspondence concerning loans and new accounts, marking those sections which are to be incorporated in the respective credit folders. Finally, it is his duty to review and inspect all new and revised folders prepared during the day by his assistant.

Functions of the Assistant Credit Manager. The generai function of the assistant is to keep the department running smoothly and efficiently and to solve problems of minor importance, involving matters of routine, as they arise. It is his duty to distribute the work to the other employees of the department and to assume full responsibility for the successful completion of the work assigned. He checks over the new account cards and sets the machinery in operation for assembling adequate information on names that apparently justify the development of a folder. All commercial accounts whose initial deposits are substantial are ordinarily marked for investigation. Requests are thereupon forwarded to mercantile agencies for reports and letters sent to bank and trade references requesting information on the subject under consideration. If the bank is a member of a Credit Interchange Bureau, an inquiry ticket is sent to that organization. In the majority of cases, a form letter is sent simultaneously to the new account acknowledging appreciation of his business and requesting him to fill out an enclosed financial statement blank and return it in the stamped enclosed envelope. It is usually explained in the letter that it is to the borrower's advantage to furnish the bank with a statement of his financial responsibility, so that the bank's replies to legitimate inquiries regarding his credit standing may be made. advisedly and intelligently. In this connection it should be mentioned that where a credit manager's assistant is employed, he not only makes all initial inquiries, but he also handles in a similar manner all inquiries concerning accounts undergoing revision.

As soon as the replies to inquiries are received, the assistant marks all portions which are to be transcribed and passes them on to a stenographer. He then proceeds to copy to the "comparison of statements" form all statements marked by the credit manager. Finally, he consolidates into the credit folder file all data secured from other departments of the institution.

CREDIT DEPARTMENTS OF LARGE BANKS

Organization.-A large credit department, such as found in many banks of the larger cities, includes among its personnel a credit manager, an assistant, two or more division heads, one or more investigators, clerks, and stenographers. In addition to the several divisions already implied by the enumeration of the personnel, a large department naturally divides itself into several sections dealing with investigating, filing, statement analysis, and stenographic work, respectively.

Functions of the Credit Manager. Not unlike the manager of a medium-sized department, the manager of a large department exercises supervisory power over the investigating, filing, analysis, and stenographic sections of his department. He organizes the work in a manner which makes for efficiency and employs the proper type of assistants. He cooperates with credit departments of other institutions with a view to securing reliable trade information and to obtaining the best results in the handling of inferior or bad accounts. He passes upon the numerous credit letters sent daily to the bank's many clients and correspondents. Finally, it is his function to keep in touch with the bank's borrowing customers and to acquire the broad knowledge concerning them requisite to proper and expeditious handling of his work.

Functions of the Assistant Credit Manager.-The chief duty of the assistant is to keep in close touch with the entire operation of the department and to assume responsibility for the efficiency of the various divisions and sections into which the work is separated. He is in a sense a "general utility man" and constitutes an important adjunct of the department. He is the understudy of the credit manager; hence it is important in the selection of a man for this position that an individual of sufficiently high caliber be secured so that he will be able, in case of emergency, to fill the manager's position in a creditable manner.