Commercial and Industrial (C&I) loans have become a larger part of many institutions’ portfolios due to market demand, examiner feedback and pressures to stay profitable. But there are risks in C&I lending, such as inexperience in the area and inadequate strategic planning. In order to approach it conservatively, here are six key processes to help.
- Reevaluate concentration limits and the institution’s risk appetite. This is a banking strategy discussion that needs to happen at the board of directors and executive level. Ideally, the bank will stress the portfolio so management can adapt these strategies if the stress test results are not favorable. Armed with that information, bank management can appropriately change concentrations or behavior to ensure that risk remains within a reasonable threshold.
- Review existing underwriting policies to ensure they incorporate appropriate commercial standards. What financial statements or returns are required for review, and how often? What expectations are there for a global cash flow analysis? What matrix or scorecard will be used for risk ratings, and how do they relate to risk thresholds? How will loan pricing change?
- Update the board of directors, lenders and credit analysts. This is important so that expectations align and there is an understanding of any revised commercial underwriting policies. Policies are only sound when the involved parties understand what is required and can execute properly.
- Invest in technologies. If your lenders or analysts are less experienced with this type of credit analysis, consider investing in a system that automates risk evaluation and loan pricing. For example, spreading software could simplify analysis and get analysts out of an error-prone spreadsheet-based program.
- Adjust hiring policies or re-allocate existing analysts. As a bank or credit union increases a particular concentration, examiners will be studying whether they are proactively staffing the area.
- Seek external guidance. In some cases, it might be a more cost-effective solution for a bank or credit union to outsource steps of the origination or review processes. A loan review firm, for example, could increase the efficiency with which credits are reviewed while also ensuring that the financial institution is in compliance with regulations. This could be a short-term solution while the financial institution makes necessary technological or human resource investments that would allow for analysis to later be completed in-house.
By: Sageworks