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What are the advantages of implementing relationship-based lending?

September 10, 2013
Read Time: 0 min

This video is a segment taken from a recent webinar hosted by Jay Borkowski, vice president at Sageworks, and Joe Waites, president of CECO Management Consultants. For the full recording, visit “Relationship-Based Banking: How to Balance Risk & Relationships”.

From the video

Advantages for the Institution

Relationship-based lending boosts the likelihood of winning the borrower’s future loan business. If they have had a good experience, they are more likely to come back to the same institution and even possibly overlook discrepancies in pricing.  “The art of customer service is becoming increasingly important as interest rates stay low and competition remains stiff,” according to an article in American Banker. “A recent study by CS Consulting group found that small banks that focus on service rather than offering the lowest pricing had more success.” 

This could mean more potential revenue from multiple product lines and referral business, and businesses may also be willing to pay a slight premium to borrow from a local bank based on the relationship that has been developed. 

Advantages for the Borrower

When there is a long-term relationship, the credit availability increases and the understanding of needs broadens.  This can lead to proactive lending verses reactive lending. The collateral requirements for the borrower will likely be lower, and there will be personalized service along with an increase in chances of loan approval.

Areas of Caution 

In any relationship, if you get to know a person too well you may skip or lessen the analysis of credit risk during underwriting. Further, assessments of creditworthiness could become subjective, and there’s a risk of annual reviews being less comprehensive. All of this could lead to difficulty justifying relationship-based loan decisions in exams and to the board. 

 

For more in-depth information on best practices for outlining key credit risk metrics, defining staffing roles and responsibilities and implementing standardized credit risk solutions, download the whitepaper titled, “How to Balance Relationship-Based Lending & Risk Management.”

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