Learning Objectives:

  • Monitor a commercial loan portfolio.

  • Identify early warning indicators.

  • Manage portfolio concentration risk.

7.1 Portfolio Monitoring and Early Warning Systems

Ongoing monitoring is essential to maintain portfolio quality . This includes financial covenant monitoring, site visits, review of payment patterns, and regular credit reviews . Early warning indicators are behavioural, financial, and market signals that precede borrower default . Building a monitoring checklist helps detect deterioration proactively .

7.2 Portfolio Concentration Risk

Portfolio concentration risk involves measuring and managing concentration by industry, geography, and loan type . Banks apply diversification strategies to reduce portfolio-level risk . Risk diversification is one of the core principles of lending, spreading credit across borrowers and sectors to avoid concentration risk .

7.3 Loan Classification and Grading

Loan classification and grading applies regulatory classification categories to impaired credits . Asset classification determines how loans are classified based on their performance and the risk of default. Understanding how classifications drive reserve requirements and management reporting is essential for loan portfolio management .

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