Loan covenants are critical to banks and credit unions as they manage credit risk. They become especially important when business borrowers face stressors that could affect their ability to repay the loan or run their business.
Notably, many banks recently reported having tightened standards and terms on C&I loans to large, middle-market, and small firms due to the less favorable or more uncertain economic outlook. Two-thirds of Senior Lending Officers said covenants remained basically unchanged, but almost a third reported having tightened them in the second quarter.
Understanding what loan covenants are, when financial institutions should use them in business lending, and how to monitor them can support strong lending portfolios and credit risk management best practices.
This refresher on loan covenants may be helpful as commercial lenders, credit managers, credit risk managers, and others navigate the institution’s push-me-pull-you goals of growing balance sheet liabilities while mitigating rising pressures on credit quality.
Abrigo Director of Advisory Services Kent Kirby and Abrigo Senior Advisor Rob Newberry recently provided guidance on covenants during the webinar “Demystifying covenants: Who needs them and why.”