Annual loan reviews are a critical component in monitoring the health of a credit after it is initiated. How is it distinguished from the loan review process (credit risk review), and what common pitfalls can impede an effective annual review process?
What is interesting about annual reviews is that there is no standard process or method that all banks follow. However, in a recent poll, 47% of banks reported that they require annual review for all loans above a certain threshold, while 54% of banks perform a full-blown analysis—as if underwriting new money—during an annual review.
The 2020 Interagency Guidance on Credit Risk Review Systems recommends that loan review should occur "typically annually, on renewal, or more frequently when internal or external factors indicate a potential for
deteriorating credit quality or the existence of one or more other risk factors.” Regulators expect financial institutions to develop loan review or credit review systems tailored to their specific risks and circumstances. This means that loans that are already examined throughout the year do not necessarily need a scheduled annual review. Credit risk review is ongoing, and the annual review component is intended for loans that would otherwise not be touched from year to year.
Abrigo Director of Advisory Services Kent Kirby says many financial institutions waste time on overly robust annual loan review processes. Kirby and Abrigo Senior Advisor Rob Newberry recently provided guidance on the annual review process during the webinar “Navigating annual reviews: How should you approach them?” The following can help your financial institution develop a more efficient, effective annual review framework.