Errors in Loan Booking

Based on personal judgement even after all the necessary search, inquiry and investigation about a prospective client, we come to a concluding point when we decide to grant or decline a client’s loan request.
Most at times we judge our clientele, based on their comportment, looks, gestures, fluency and all what not. The truth remains that all the aforementioned points are not enough to make a micro finance institution decide to grant a loan to a client or not. Customers will come with all sort of tactics to create a first impression about him/herself. Some will go as far as doctoring their cash flow in other to make their books look to tantalizing which is to enhance their chances of gaining access to the microloan.
Unidentified error prevail most at times when making decision about a client’s proposal for loan. These error cost so much, yet microfinance banks do not put into consideration what level of damage it has done and for this to be address we need to understand the type of errors associated with loan booking; These are known as TYPE I and TYPE II Errors.

Type I Error in Loan Booking
Type 1 error in loan booking is a situation when loan is granted to a customer who will eventually default. He will default not because of unforeseen circumstances beyond his control but because, evidence from the on-set shows that the customer will not be able to make good his promise. He is limited by capacity to do so.
Errors of this magnitude are usually committed when an MFB wants to meet its loan target by all means necessary not minding who the loan is given to or what the customer really need it for.
It also arises based on the target pressure given to credit/loan officers by MFB managers and top management staffs. Here, loan officers are forces to make their own judgement on who to grant loan to, whether the client is qualified or not.

Type II Error in Loan Booking
In micro finance, Type 11 error arises when loan meant to be given to a customer who will certainly repay is denied such loan yet, management put pressure on loan officer to generate loans that will boost the MFB’s loan portfolio. No wonder most loan officer end up bringing in bad loan which in turn erode the bank’s profitability.
Why do we allow profitable opportunities slip by us when we are actually supposed to take advantage of such opportunities to grow the profit that keeps our businesses alive? This theoretic question i asked myself, though not expecting an answer.
A loan file i had presented to the management of my organization for approval had just been rejected. The loan was rejected based on the fact that they were not comfortable with the loan. This was a straight forward transaction which type had been previously executed with other clients. I felt perplexed and frustrated but, what can i do about it. I tried all i could to make the management of my organization see the need to approve and disburse the loan, alas! It was still rejected.
http://www.investopedia.com/terms/t/type-ii-error.asp, describe type II error as “A statistical term used within the context of hypothesis testing that describes the error that occurs when one accepts a null hypothesis that is actually false”

ERROR REMEDIES

Apart from financial constraints, these type of errors could be applied to our personal lives and dealings with family and friends in terms of personal borrowing that most likely are not returned due to the relationship that exit between the lender and receiver. In other to determine how best to remedy the situation, look no further than conducting due diligence, adhere strictly to the 5c’s and pray you have a discerning spirit in other to know who and how best to serve your clientele base.