Describe the factors that bank should consider in loan pricing

The following is a list of factors that institutions should consider in loan pricing.

Cost of funds:
The cost of funds is applicable for each loan product prior to its effective date, allowing sufficient time for loan-pricing decisions and appropriate notification of borrowers.

Cost of operations:
The salaries & benefits, training, travel, and all other operating expenses. In addition, insurance expense, financial assistance expenses are imposed to loan pricing.

Credit risk requirements:
The provisions for loan losses can have a material impact on loan pricing, particularly in times of loan growth or an increasing credit risk environment.

Customer options and other IRR:
The customer options like right to prepay the loan, interest rate caps, which may expose institutions to IRR. These risks must be priced into loans.

Interest payment and amortization methodology:
How interest is credited to a given loan (interest first or principal first) and amortization considerations can have a impact on profitability.

Loanable funds:
It is the amount of capital an institution has invested in loans, which determines the amount an institution must borrow to fund the loan portfolio and operations.

Patronage Refunds & Dividends:
Some banks pay it to their borrowers/shareholders in lieu of lower interest rates. This approach is preferable to lowering interest rates.

Capital and Earnings Requirements/Goals:
Banks must first determine its capital requirements and goals in order to determine its earnings needs.