Markov's transition matrix and its application to loan tracking in commercial banks

Lending being one of the principal business of a bank accounts for a major portion of its funds. Banks provide loans to different sectors of the economy for different purposes. Of courses, lending is main business of a bank but as the same time it is highly risky. As such, while lending money to borrowers, a banker must consider cardinal principles of safety, liquidity, diversification of risks, profitability and customer satisfaction.

Keeping in view these principles, bank has to formulate loan policy, specifying strategic guidelines with respect to size of loan and its compensation, acceptable security and margin requirements, lending criteria, maturity period, limitations of lending authority etc.

With a view to ensuring the end use of the loan, it is necessary for the bank to keep a track of the loans Outstanding, this task is performed by credit department with the help of lending officers. This Markov's Transition Matrix helps the lending officer to track the loan and take measures accordingly.