Why risk management is key
When risks are identified in an efficient manner, lenders can take corrective actions sooner. Understanding the financial metrics surrounding a specific loan agreement, interest rate fluctuation or a borrower’s declining revenues can give loan officers an opportunity to quickly consider a mitigating action like repricing or recalling the loan.
Portfolio monitoring makes it possible for the loan officer to protect the bank’s investment. Loan reviews provide lenders with access to real-time feedback about loan performance while there’s still time to take corrective action. Portfolio monitoring provides lenders with the opportunity to make informed decisions.
What is portfolio monitoring?
Portfolio monitoring is the evaluation of a financial institution’s loan portfolio. The process analyzes perform-ance metrics, identifies risks and finds opportunities for the lender. Such data includes creditworthiness, changes in financial data since the loan origination period and more. It reduces portfolio risk, promotes regulatory compliance and minimizes losses.
Credit monitoring works hand-in-hand with a bank’s underwriting process. When a new loan application is reviewed, the borrower’s credit risk is measured.
The credit assessment process considers whether the borrower can pay back the funds according to the repayment schedule. When borrowers are less likely to meet the terms of the loan, they are at higher risk. When they are at higher risk, they may be denied or forced to consider higher interest rates or collateral. If the borrower’s risk rating is acceptable, a loan offer is extended.
The lender assumes the borrower’s credit profile will remain solid throughout the loan. However, covenants are included in the agreement, which provide borrowers with a set of minimum standards to reach. Without a strong loan portfolio monitoring process, lenders may not know which borrowers are no longer meeting those standards.
Regulatory compliance
Banks must comply with requests from both state and federal regulators. Since risk management processes, reserve account maintenance and underwriting standards are most frequently scrutinized, loan portfolio monitoring aids lenders in meeting reporting requirements, quantifying risks, supporting due diligence requests and calculating capital.
There is a lot of competition in the business lending industry. However, financial institutions must balance their profit margins with industry standards. As other commercial lenders adopt new underwriting and portfolio management standards, it is important to understand how the direction of the industry standards will affect your portfolio performance.
For example, many commercial lending institutions have needed to adopt IT standards to minimize the risk of cybersecurity threats. Other lenders have adopted the industry standard of delivering instant decisions on credit applications.
Portfolio optimization
Effective portfolio monitoring minimizes financial losses. Monitoring loans throughout the entire loan term identifies, through stress testing, loans that have a high probability of defaulting in the current year, generating a financial loss for the lender.
Lenders compile loan portfolios for the profit of making more money for the financial institutions. The return on investment (ROI) of each loan shows debt issuers how much profit or loss each lending decision yields. By analyzing the ROI of current debt arrangements in the portfolio, lenders can increase future ROI by repeating lending decisions that yielded the highest returns.
Regularly evaluating a loan portfolio allows loan officers to isolate patterns of profitability. By understanding the predicted movement of interest rates and loan volumes in their portfolio, they can begin to adopt loan screening processes to optimize the overall performance of the portfolio. The best way to identify these patterns is by consistently measuring and recording rate activity and current loan performance metrics.
While some losses are unavoidable in the business lending process, the loan loss rate of a financial institution can impact relationships with potential investment partners and shareholders if there are too many unexpected contribution requests. Using automated loan portfolio management allows lenders to mitigate risks and minimize losses before they impact the portfolio. Depending on the identified risks, banks can minimize losses by increasing high-earning, short-term loans or reducing the number of high-risk debts through practices like repricing or recalling.
Takeaways
Texas-based lenders are always looking for new ways to improve the lending experience and better manage their risks. Given the size of borrowers and the sheer number of transactions that take place in a state as large as Texas, having real-time data is a must.
Loan portfolio management systems give lenders insight into the overall performance of their portfolios on an ongoing basis, providing real-time financial data that can be used to protect the bank’s investment, reduce risks, maximize profits and improve customer relations.