Asset Based Lending
Chief Investment Officer
Commercial Loan Automation
commercial banking best practices
The business of commercial banking hasn’t changed much in many decades. Sure, regulatory requirements made documentation more cumbersome than ever, and Global Cash Flow is back in with a vengeance, but, overall, the way we solicit, underwrite, board, disburse and maintain our credits is essentially the same. It’s time for a change!
Some of your commercial segments can’t bear the heavy underwriting costs and lengthy approval processes. It’s time to reevaluate the entire process, soup to nuts, for all credit segments. Technology has made meaningful advances; our customers’ expectations have changed, and the world is changing too. Let’s capitalize upon these shifts to make our commercial banking processes more efficient and effective.
Consider some of these thoughts:
- Modify credit process to fit different customer segments. This is the most important recommendation in this article. Nothing will give you greater payback than implementing this suggestion. Most banks today underwrite all credits in the same way, and the process itself, including data points and logic, hasn’t changed for ages. Both aspects need to change. Do not use the same credit requirements, covenants and documentation for all size credits. It really doesn’t make sense. Start an evaluation process to assess what are the appropriate underwriting requirements for loans in all business segments – micro, small business, commercial, middle market and large corporate – whichever way you define these segments.
- Use automation to improve underwriting efficiencies. I’m not recommending that you underwrite your borrowers using Yelp ratings exclusively, but I do think that new information such as these ratings, as well as Angie’s List and others, can provide early warning for future cash flow problems, especially in sectors that are difficult to predict (hospitality, contractors) and are fragile credit-wise. Additional data will only enhance your credit preparedness; it is an addition, not a replacement, to your current process.
- Change loan renewal handling. Currently this cumbersome process falls all too often on the RM’s desk, and, from there, to their assistant. Is there a reason why standard renewals should not be handled centrally, especially for credit lines, if the process is not used for client contact and relationship management purposes? You can free the RM’s and their AA’s time to handle that aspect of their job by taking the administrative elements off their table, increasing efficiencies, reducing renewal process time, and, most importantly, avoiding double renewals (which happen too often due to missing documentation).
- Consider a brief opportunity memo before you go into full-blown underwriting for prospects. There is nothing more frustrating for an RM to cultivate an opportunity for a long time only to discover that the credit or desired terms are unacceptable to the bank. An opportunity memo should provide an initial indication of the bank’s tolerance of the credit. While not a guarantee of approval, it can substantially reduce the RM’s wasted time chasing deals that will never come to fruition.
- Provide a secondary touch-point to anchor customer relationships to the bank and not the banker. The AA is a good secondary point, but it’s even better when you have a strong portfolio manager of another banker who is intimately involved in the relationship. Reducing client defection is a critical aspect of managing the loan book, and this is one important tool to get there.
- Conduct full reviews of the entire loan book at least twice a year. Many of us claim to have a thorough review of the book and individual relationships within the book at least annually. Unfortunately, the review is sometimes perfunctory and not substantive, thereby adding no value to the bank or the client. Meaningful review can add value to the customer (see more below as to client expectations) and to the bank, as it invariably uncovers opportunities for additional unmet needs.
- Map out your commercial-related processes. It is a frustrating and shocking process, to see how many steps are required to get a loan out the door. It’s worth the time though; it exposes the numerous extra steps and documents you require which really do not enhance the credit decision or the loan collectability in the future. Take a critical look at what you’re doing today. You will be surprised.
- Learn from your competitors – not just bank competitors. I know you’ve heard enough of Lending Club, OnDeck, Kabbage, LendKey etc. My point is simple: although their processes have not gone through another credit crisis, they do offer elements that might enhance your own process. Furthermore, the current state of the economy is nothing like the frothy 2005-2007 era, so what gets underwritten today is being done in a less favorable environment. It’s true that exceptionally low rate positively contribute to the borrower’s ability to repay, but a stagnant economy offers somewhat of a counterbalance. See what you can learn from this new crop of lenders and take the bits that suit you best, rather than toss it aside lock, stock and barrel.
- Beef up loan review, especially for new loans right after booking. As your book grows and you try new approaches, segments and technology, increasing portfolio scrutiny makes sense to counteract growth and the newness of some of your processes.
- Consider growth segments that fit your risk appetite and core competencies. Many of the banks that attend our forums are focusing their efforts on specific industry segments where they develop expertise and reputation. Examples are abound, from franchises (with segmentation as specific as the type of operator and the mothership support to the franchisee) to studies of growth segments which refine the targeting (e.g. within assisted living – memory care; skilled nursing; etc.). The better and more refined the segment definition and the understanding of its profitability dynamics, the more effective your underwriting and marketing will be.
- Do not enter any new segments without the requisite infrastructure and expertise. Specific industries have their own characteristics, as we all know. Targeting a new segment without establishing the underwriting process and criteria in advance is unwise. Also, having RMs who are intimately familiar with the new segment is another key requirement for effective marketing and avoiding adverse selection.
- Resist the temptation to go too far up the food chain. As your bank grows, so does the appetite for larger loans which will make a dent in your growth goals. As you consider loan growth, make sure you do not abandon your bread-and-butter smaller credits, which also contribute more than their fair share of deposits. Those are your core business, and they GENERALLY are less price sensitive and more loyal than their larger brethren. There are always exceptions, of course.
- Remember – what we think the customer wants and what they actually do want are often two different things. Greenwich Research, the authority on commercial and small business market research, finds time and time again that our own bankers’ perceptions do not match customers’ and prospects’ priorities and expectations. Specifically, most recent research, consistent with past findings, asserts that:
- Your customer wants you to demonstrate you understand their business.
- Focus on industry trends
- Have conversations about their industry
- Provide them with access to recent capital markets information
- Provide innovative advice and ideas.
- Ask questions on their capital structure and depth
- Present to the customer the analysis the bank conducts of their business – they want to learn how you look at their credit worthiness
- Identify business opportunities for them
- Share with them debt capacity analysis – how the bank looks at covenants and how much more borrowing room do they have.
- Be easy to work with.
- Respond to inquiries the same day
- Effectively manage the bank resources
- Follow every meeting with a memo summarizing what was agreed upon.
Reams can be written on this topic alone – perhaps a subject for another article? In the meantime, see what you can do to streamline your cradle-to-grave loan process, even without considering technology enhancement. The payoff is significant to all – clients, bankers and shareholders.