During the pandemic, many FIs have been forced into a reactionary mode of addressing deferments, PPP loans, renewals, modifications, portfolio management and some new loans. All these issues have added to the dreaded “credit churn.” When the FI touches credit issues such as new analysis, DSC calculations or credit memos falling under the same borrower relationship many times during the year, credit churn happens.
“Each time we touch a credit facility under the same relationship, we’re reinventing the wheel,” said Ty Glenham, Senior Lending Consultant of Profit Resources, Inc. “While it costs the FI a great deal in terms of time and resources, does it really manage their credit risk any better?”
Instead of reinventing the wheel, Glenham suggests maximizing the credit review process, with a deeper dive analysis at review, which often is not within a 12-month timeframe. The first step is to shift the FI’s mindset from an annual review process to a periodic credit review. Call it what it is!
How to Maximize the Periodic Credit Review
- Scale both the periodic credit review and loan requirements based on the complexityof the commercial loan or relationship. Scale down for smaller credits.
- Change the periodic credit review process to be the focus for a more detailed credit analysis of the aggregate borrower relationship.
- Evaluate the credit risk with fresh eyes to establish the proper credit risk rating. Don’t allow the previous credit rating to bias the current risk evaluation.
- Conduct a stress analysis to determine the maximum credit exposure the bank would extend based on this detailed credit analysis. This establishes an “internal credit exposure or guidance” regarding how much additional credit could be extended and expedites the credit process for any additional loan funds during the coming year.
- Streamline other related loans under the aggregate relationship to a short-renewal form, referencing the last credit review, cash flow (DSC), and other credit factors. This stops the “churn” of the credit cycle.
Questions to Ask in the Credit Review Process
- What impact has Covid-19 had on the borrower and what adjustments are being made?
- Where is credit risk going with this borrower, business, industry, economy?
- What are the credit issues, concerns, trends and needs currently and going forward?
- What are the risks to repayment?
The Credit Review Process should be scheduled to provide a timely and effective evaluation of the credit risk for the borrower and/or relationship. The review process identifies any concerns and provides a roadmap for the lender and credit officer in managing or monitoring this credit.
By changing our credit mindset, we can streamline and maximize the credit review process,” Glenham said.
Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to propel growth and improve profitability.