DEFINITION of 'Loan Grading'

A system of credit scoring that assigns a rating of asset quality to a portfolio of loans. Loan grading is based upon a comparison of all loans that are outstanding within a given portfolio. This system places loans into one of six categories, ranked from most stable to complete write-off, or unreviewed.

BREAKING DOWN 'Loan Grading'

The risk-classification system used by the National Bank Examiner is employed by a large percentage of lenders. They use this system to assign a rating to portfolios of commercial loans. This is because lenders must use the same format when they file their quarterly reports of condition to bank supervisory agencies.

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