This post is a feature from my colleague and guest blogger, Stephanie Butler, manager of Process Architects in Advisory Services at Baker Hill, a part of Experian.
Are you tired of the economic doom and gloom yet? I am. I’m not in denial about what is happening — far from it. But, we can wallow or move forward, and I chose to move forward. Let’s look at a few of the many lessons that can be learned from the year and some action steps for the future.
1. Collateral does not make a bad loan good
Remember this one? If you didn’t relearn this in 2008, you are in trouble. Using real estate as collateral does not guarantee a loan will be paid back. In small business/commercial lending, we should be looking at time in business, repayment trends and personal credit. In consumer lending, time with an employer, time at the residence and net revolving burden are all key. If these are weak, collateral will not make things all better.
2. Balance the loan portfolio
Too much of a good thing is ultimately never a good thing. First, we loaded our portfolios with real estate because real estate could never go bad. Now, financial institutions are trying to diversify out of real estate and move into the “next great thing.” Is it consumer credit cards, commercial C&I, or small business lines of credit? It’s anyone’s guess. The key is to balance the portfolio. A balanced portfolio can help smooth the impact of economic trends and help managing uncertainty. We all know that policy requires monitoring industry concentrations. But, balancing the portfolio means more than that. You also need to look at the product mix, collateral taken, loan size and customer location. Are you too concentrated in unsecured lending? How about lines of credit? Are all of your customers in three zip codes?
3. Proactive vs. reactive
The days of using past dues for portfolio risk management are gone. We need to understand our customers by using relationship management and looking for proactive markers to anticipate problems. Whether this is done manually or through the use of technology, a process must be in place to gather data, analyze and anticipate loans that may need extra attention. Proactive portfolio risk management can lessen potential charge-offs and allow the bank to renegotiate loans from a position of strength.
Be sure to check my next post as Stephanie continues with tips on how to get back to risk management basics.