Credit Quantity is Important, Too
The art of commercial lending is the ability to
maintain a delicate balance between credit management and
relationship-building.
Commercial lenders use many metrics to gauge performance. Activity measures view the volume of
loans produced and managed by each lender; efficiency measures
indicate profitability; and credit quality measures help in predicting
potential losses and establishing provisions for them.
These metrics are effective in
judging short-term performance and in providing a basis for risk
management, but improving them requires another element: How are
loan officers spending their time?
Credit management involves all
activities performed by the commercial lending and credit staff
to make and sustain profitable loans. The perspective tends to be
one of quality over quantity: preparing the loan for underwriting;
identifying risks; making a decision to extend credit; offering and
negotiating the terms of a commitment;
documenting; and closing, funding, and maintaining the loan.
All these activities require
dedicated resources, including loan officers' time. It's a wonder a
moment could be left over for developing new business.
Building existing relationships or
developing new business involves emphasizing quantity, the opposite
perspective from credit management. Sourcing
business through centers of influence in the community, making
contacts, and understanding customer needs require
continual effort by the same loan officers involved in credit
management.
How much time should be devoted to
each, and how can it be managed effectively? Most lenders understand
that relationship-building opportunities
should be maximized, but not at the cost of credit quality. Our
experience working with commercial lenders tells
us the following:
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Many commercial lenders do not measure how much time their
loan officers and administrative staff spend on credit management and
relationship-building.
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Those who do not know how their time is allocated tend to
spend most of it on credit management.
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Those with a stronger focus on credit management tend to have
portfolio growth in niche segments, such as commercial real estate, where the
value of the collateral is easily determined.
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Growth in niche segments tends to result in portfolio
concentration in those segments, eventually adding unwelcome risk.
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Mitigating the risk of concentration requires expanding into
non-niche segments, which requires significant relationship-building.
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Freeing up time to build relationships requires that certain
activities be taken away from the lending staff, so they can increase their calling
efforts.
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