Process flow of the banking Industry

The bank serves as a financial intermediary or institution that collects funds from the public in
the form of deposits and further lends them to people who experience a shortage of funds. They
move the available funds from people who save to people who have productive investment
opportunities.

In simple terms, banks serve as the linkage between small savers and borrowers to benefit from
the existence of available funds, thereby increasing the efficiency of the economy. Each deposit
account of the savers is expected to generate interest income as a consequence of supplying
their money to the bank, while on the part of the borrower, they need to pay a specific amount
of interest as the cost of borrowing, which is deemed higher than the interest that deposit
accounts usually earn. The amount of interest charged on a loan usually depends on the amount
of the loan, loan duration, credit score, and assessed level of risk.

So, the difference in terms of the rates between the deposits and loans indicates the profit of
banks through their operations. However, such activities involve specific steps and procedures in
order to protect banks from losses resulting from financial defaults.

So now I am going to go over the process flow of lending money to borrowers or the general
public.

First, the process starts with the credit investigation.

This credit investigation usually aims to check the financial stability of a new client. Specifically, it
determines if the client has the capability to settle their obligation when it becomes due. Most
banks usually conduct this activity through the use of the 5c’s of credit (character, capacity,
collateral, capital, and conditions).

The second part of the process was the approval of credit.

In the event that the borrower is determined as financially capacitated, the bank will now set a
specific credit limit in which the amount of the loan shall not exceed the specified limit.
Therefore, the limit indicates the maximum amount that a certain client can borrow from the
bank.

After the approval of the credit, the next step of the process was the credit review.

This step aims to serve three primary purposes. First, was to determine the credit risk of the
borrower or the possibility that the borrower would repay the loan at the right time. Second,
was to examine the borrower’s credit history. This credit history reflects the financial track record
of the borrower and, in particular, it shows the attitude of the borrower towards repaying the
debt. Lastly, was to uncover any potentially negative data in the financial history.
After the credit review, the bank will now set their provisions.

These provisions were calculated by classifying all the loans based on their risk rating. These
provisions indicate that the bank will recognize a loss ahead of time. Usually, banks intend to
allocate a specified amount of capital to absorb such loss.

So those steps cover the entire process of granting loans to prospective borrowers within the
economy.

And aside from the granting of credits, banks also offer other financial services, which are
usually performed by investment banks. And these financial services are usually performed by 3
major offices, namely: front, middle, and back offices.

The front office jobs in the investment banks are the primary revenue generators, which means
they are dedicated to help banks in making money. Some of the duties involved in the front
office may involve trading of securities, derivatives, and equities; managing client assets; and
investigating potential investment opportunities.

While the middle office provides risk management services to the front office. This office
specializes in assessing risk and tracking and calculating profits and losses. Furthermore, this
office exists due to the emergence of increased complexity in financial transactions.

And the last office was the back office, where they handle the day-to-day operations of the
investment banks. Generally speaking, it provides administrative, payment, and support services.