I have been tasked with revamping our current loan grading system. The system we have now is somewhat vague, and we are looking for it to be more quantifiable. For example, instead of saying "Grade 3: Collateral provides adequate protection against loss", we would say something along the lines of "Grade 3: Collateral will have a LTV between 70-75%". We would also like to have ratio guidelines for each risk grade, and my management wants a Grade 4 Pass and a Grade 4 Watch (we are on an 8-grade system).

So, I'm curious as to what you all think about this and if your banks have quantifiable criteria for loan grading? I'm suppose to start determining what ratios would fall under what loan grades, and I'm not sure where to start. Any suggestions?

Start with your regulator loan grading system.

If you want to send me a PM, I will send you what we use.