Module: | MODULE B: RISK MANAGEMENT
Q387: Consider the following statements regarding the Loan Review Mechanism (LRM) in commercial banks:
1. A primary objective of the LRM is the early identification of portfolio quality deterioration and the initiation of corrective action.
2. To ensure continuity of information, the LRM must be conducted by the same credit officers who originally appraised and sanctioned the loan.
3. The scope of LRM is restricted exclusively to Non-Performing Assets (NPAs) and Special Mention Accounts (SMAs).
Which of the statements given above is/are correct?
2. To ensure continuity of information, the LRM must be conducted by the same credit officers who originally appraised and sanctioned the loan.
3. The scope of LRM is restricted exclusively to Non-Performing Assets (NPAs) and Special Mention Accounts (SMAs).
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The Loan Review Mechanism (LRM) is an essential post-sanction control tool.
Its primary objective is the early identification of portfolio quality deterioration, triggering Early Warning Signals (EWS) to initiate corrective actions before an account turns into an NPA.
Statement 2 is incorrect: Independence is the bedrock of LRM.
It is strictly mandated that the review must be conducted independently of the credit administration/sanctioning department.
Officers who appraised or sanctioned the loan cannot review it, as this creates a severe conflict of interest.
Statement 3 is incorrect: The scope of LRM is broad.
It is not restricted to stressed assets (NPAs/SMAs). A robust LRM continuously evaluates healthy, standard accounts (especially high-value corporate loans and off-balance sheet exposures) to ensure ongoing compliance with lending policies and to verify that the assigned credit ratings remain accurate.
Its primary objective is the early identification of portfolio quality deterioration, triggering Early Warning Signals (EWS) to initiate corrective actions before an account turns into an NPA.
Statement 2 is incorrect: Independence is the bedrock of LRM.
It is strictly mandated that the review must be conducted independently of the credit administration/sanctioning department.
Officers who appraised or sanctioned the loan cannot review it, as this creates a severe conflict of interest.
Statement 3 is incorrect: The scope of LRM is broad.
It is not restricted to stressed assets (NPAs/SMAs). A robust LRM continuously evaluates healthy, standard accounts (especially high-value corporate loans and off-balance sheet exposures) to ensure ongoing compliance with lending policies and to verify that the assigned credit ratings remain accurate.