A loan portfolio is the totality of all loans issued by a bank or other financial institution to its customers.
The portfolio can consist of both safe and risky loans. A diversified loan portfolio should contain a mix of different borrowers and industries to minimise the risk of losses.
The loan portfolio is usually reviewed and evaluated regularly by the bank or financial institution to ensure that the loans still meet the bank's risk, return and liquidity requirements. The review of the portfolio takes into account both quantitative and qualitative factors, such as the creditworthiness of the borrowers, the industry structure, the regional risks and the quality of the collateral.
Credit portfolio management also includes deciding on the distribution of loans across different maturities and interest rate structures, as well as determining strategies to minimise risk, such as through the use of collateral or by transferring risks to third parties.
The quality of the loan portfolio has a significant impact on the financial stability of the bank or financial institution. A high default rate of loans in the portfolio can lead to significant losses and endanger the financial stability of the institution. It is therefore crucial that the loan portfolio is well managed through appropriate risk control and monitoring.
