Centralized and Decentralized Approaches to Underwriting and Portfolio Management

During the most recent offering in RMA's Credit Risk Management Audio Conference Series , Mike Weltzer, SunTrust, and John A. O'Connor, Praxis Advisors, LLC, discussed the issues currently facing small business lending leadership.

As business banking has proven itself "worthy" of larger credits, there has been upward pressure on middle market to increase its "floor". Changes in the definition of middle market have been focused more at the bottom end than the top. Middle market has generally started where business banking stops - but not in all cases. Some lenders have an overlap: Business banking does not have the requisite skill sets to decision and manage all larger/complex credits; credit policy does not permit streamlined processing above a certain number of dollars and for some there are certain industry exclusions. Middle market has only recently begun to measure the cost of originating and maintaining the smallest dollar credits. When it does measure the cost, smaller dollar relationships are not profitable, signifying another driver of changes in definition between the two groups. Larger dollar relationships have been largely immune to decision turnaround time and for some this is another reason to increase the floor in middle market. Others have started to measure and manage middle market turnaround time.

Over the years, business loan  centers have focused on sales and process efficiency gains. While credit fulfillment has become more automated, some portfolio management groups have languished in a manual world. Higher performing lenders have leveraged scoring and internal loan performance attributes in their creation of early warning systems, allowing them to automate portfolio management yielding that's better positioned for expansion and give them better control of their credits.

Going forward, Weltzer and O'Connor suggest that credit should be a common approach across reporting lines and reflected in culture, discipline, and practice. Banks should not compromise beyond comfort level, but instead finance what is understood, stick with the fundamentals, and  focus on profitable growth. Banks should align front line relationship manager's score cards. Credit quality is everyone's responsibility (complete packages, data requests for covenant monitoring/renewal/review, identification of customer issues). Management should focus on the retention of quality and profitable relationships. Weight should be put on portfolio performance as well as growth performance. Ultimately, banks need to work on having credit viewed as a partner, assisting the line with identifying the right customers, products, and structure.

Join us for the next offering in the Credit Risk Management Audio Conference Series on Tuesday, June 9, 2015, Data Compliance Issues: Data Integrity, Data Management, and Other Lending Process Regulatory Compliance Issues.

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