The silent threat to credit quality: Innovation gaps

The path to closing innovation gaps

In the effort to avoid risk (as opposed to manage it), the result is often an elevated risk profile due to inefficiency, ignorance and error. But there is a way to fix this. This isn’t easy—but it is straightforward.

Principles

Start with a clear foundation:

• Focus on decision making speed and quality
• Favor controlled, incremental change over reactive “big bang” efforts
• Prioritize risk reduction over marginal productivity gains
• Align credit culture, policy/guidance, and incentives with the desired operating model

Identify blind spots

Bring the right people (line, credit, loan servicing, CRO, CCO, CFO) into a room and dissect the credit process end-to-end. The only “sacred cow” is that there are no sacred cows. If a step exists, it should be defensible. If it isn’t, it should be challenged.

Ask simple but uncomfortable questions:

• Why does underwriting take so long?
• What slows approvals?
• Where are exceptions and overrides coming from? Are they relevant to the true credit risk of the institution, or just pet peeves?
• How are people actually spending their time?
• Where are losses—or (more likely) excessive servicing costs—emerging?
• Do we have the data we need? If not, why?

The goal is clarity: what prevents effective, quick, risk-based decisions?

Fix the operating model

Most efforts fail due to resistance to change rather than due to a lack of insight. Without executive and board-level alignment from the start, modernization will stall.

Focus on:

• How time is actually spent vs. how it should be spent
• Streamlining underwriting and eliminating low-value steps
• Reducing unnecessary approvals
• Clarifying accountability
• Aligning incentives with desired behaviors

Once you go through this process and make the necessary adjustments, the next step is to ensure that your policies, guidance, and procedures (as well as the incentive program) are simplified and realigned to the new model and CLEARLY communicated to your team with plenty of time for feedback and internalization.  To simply impose change without communication and alignment is another major flashpoint of failure.

Modernize data (incrementally)

You can’t fix data all at once. But you do need to start somewhere. Pick a handful of critical credit data elements and clean them for your largest exposures. Then expand. Build processes to maintain data quality at every touchpoint, with clear points of accountability and consequences for failure.

In parallel, improve the completeness and timeliness of borrower information, also with accountability and consequences. From there, establish governance to systematically address gaps.

Progress will be incremental, but standing still is not an option.

Use technology thoughtfully

The biggest mistake institutions make when it comes to modernizing systems is layering new technology onto broken processes. Far too often, automation fails because decisions still require excessive time and effort.

Here are some key questions to address as you consider a new loan origination system or other technology:

• What decisions can be automated?
• Where is human judgment truly needed?
• Are roles and responsibilities clear?
• Is underwriting aligned with actual risk?
• Are we identifying emerging risks early?