A bank loan is the primary source to meet the capital needs to finance an investment for a company. A credit is always associated with a risk and banks main risks are associated to their credit. In recent years, credit losses have increased for some of the Swedish banks. According to “Finansinspektionen” (Swedish financial inspection), a large part of the credit losses consists of loans for commercial real estate. There are three types of risks associated with granting loans: credit risk, liquidity risk and market risk. It is important that creditors identify the risks associated to the credit in order for the bank to avoid credit losses in the future.
The purpose of our study is to find out how Sweden's major banks are working with risk management when credit rating a customer and revaluating risk during the operating credit period. We also examined how banks appraise a property to be mortgaged. This study is based on a qualitative methodology where we have used a semi-structured interview when interviewing representatives from each of the four major banks in Sweden; Handelsbanken, Nordea, SEB and Swedbank.
The results shows that banks identify and manage the risks and uncertainties associated with granting loans by working on the basis of guidelines and policies. However, there are no guidelines for how the soft factors must be analysed when credit rating, even though they are very important to the banks. When appraising commercial real estate in connection to credit rating the banks use multiple valuation methods to ensure the value of the property. The study also shows that banks are working similar because of the fact that they are highly regulated and supervised.
Keywords: appraising real estate, credit loss, credit grant, risk management.