Loan pricing is an
important function for
a
lending company. Loan-pricing decisions directly affect the safety and
soundness through their impact on
earnings, credit risk and capital adequacy. Lending company must price loans
considering its cost, profit or loses to ensure the financial viability. An effective loan pricing determine the company growth and minimize the market risk. Loan pricing is a critical element in assessing and rating the capital, asset quality, management, earnings and liquidity for a lending company.
Loan pricing is a critically important function in a financial institution's operations. Loan-pricing decisions directly affect the safety and soundness of financial institutions through their impact on earnings, credit risk, and, ultimately, capital adequacy. As such, institutions must price loans in a manner sufficient to cover costs, provide the capitalization needed to ensure the institution's financial viability, protect the institution against losses, provide for borrower needs, and allow for growth. Determining the effectiveness of loan pricing is a critical element in assessing and rating an institution's capital, asset quality, management, earnings, liquidity, and sensitivity to market risks.