Manage your credit risk without overburdening your resources

A version of this article was previously posted on May 23, 2023 on BankDirector.com.

Increased labor costs and related challenges such as talent acquisition have affected all industries, including banks. Additionally, banks are facing:

• Potential deteriorating credit quality
• Growth challenges amidst tightening credit standards
• Increased scrutiny from regulators and auditors

Loan origination, portfolio management, and credit quality reviews are key areas to successfully managing an apparently inevitable increase to credit risk.

Prior to any changes in these areas, understanding your bank’s risk appetite and credit risk profile is critical. You should also discuss any material changes you plan to implement with your regulatory agencies and board to ensure it doesn’t create undue risks.

Loan origination

Originating new loans doesn’t have to be cumbersome and complex for both the bank and the client. The risk and rewards are a delicate balancing act. Not all loans require the same level of due diligence or documentation.

Documentation requirements and underwriting parameters

Banks might want to consider establishing minimum loan documentation requirements and underwriting parameters based on loan amounts. This can put banks at a competitive advantage compared to financial institutions requiring more documentation which can increase the loan processing time.

Centralize the loan processing

For less complex and smaller loan amounts, centralizing the loan origination process can create a streamline workflow, potentially helping with consistency and efficiency, allowing less-experienced staff to process loans.

Automation

If your bank has a high volume of loan origination requests, automation may be useful. Consider conducting, or hiring a consultant to complete, a cost-benefit analysis. You may find automation is not only cost-effective but might reduce human errors and improve consistency in credit decisions.