Building Your Growth Plan: Key Metrics to Consider – Credit Analysis
As discussed in a previous post, many banks and credit unions are turning to loan portfolio growth as the way forward. These growth plans typically focus on finding new ways to attract more qualified applications. While increasing the volume of qualified loan applications is an important component of any growth strategy, leadership at these institutions may not consider that there are ample opportunities already available in their loan application pool. Very often, banks and credit unions will pass on loan applications that don’t appear to quite meet their underwriting criteria. This practice is designed to mitigate risk, but it can also limit lending opportunities. By taking a more holistic look at some loan applications, banks and credit unions can jump-start their loan growth process while maintaining credit quality.
It is important to note that not every loan application is going to be a good fit for the institution. Applications that fail to meet requirements for cash flow, debt service coverage ratio or LTV are simply not good credit risks. However, by performing a global analysis of applicants or considering them for different products, the institution may be able to book more loans.
For example, consider a small business owner in their first year of business. They would not yet have tax returns for the business, and they would likely still be showing poor cash flows. As a business applying for a small C&I loan, they would likely be declined. However, if the business owner had strong personal credit, and the debt service for the business and the person were low, then it might make sense to issue a business credit card or revolving line of credit. By analyzing the applicant globally and considering other services offered by the bank that might be a better fit, the institution is able to take advantage of an opportunity they might otherwise have passed on.
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Additionally, document collection can be one of the biggest obstacles to booking a loan. Applicants may need to track down older documents (like tax returns from previous years), contact partners or accountants, or even have new documents generated by third parties (e.g. an artist’s rendering of proposed construction on a property for a CRE loan). If the process of collecting and submitting documents is too difficult or complex for borrowers, then the institution runs the risk of losing a profitable loan. However, if applicants can easily track, upload and be reminded of documents needed to complete the application process, they may do so more quickly and thoroughly.
In both of these instances, leveraging software solutions open up new lending opportunities. A credit risk management solution can enable the institution to accurately assess risk for individual loans with a global analysis that includes individuals, businesses and farms, as well as objective risk rating matrices. Additionally, a document management system that includes a client portal allows the applicant to see exactly which documents are required for their application, upload directly online and receive email updates on their loan status or outstanding documents from the institution.
Ambitious banks and credit unions can accelerate their loan growth with new lending opportunities already present in the loan application pool by implementing software solutions that enable them to comprehensively evaluate more loans with new data and capabilities for document management. By implementing comprehensive global analysis, considering loans for different bank products and reducing inefficiencies in the document collection process, banks and credit unions can find new lending opportunities within the existing application pool without sacrificing credit quality.