
The Lenders Corner Forum was launched in late 2005 upon the request of attendees at the Small Business Credit Training in Manila to provide a forum to discuss lessons learned and ongoing experiences. The quarterly phone forum for credit department heads, lending managers and officers, meets around a specific topic each time. Call participants share tools and templates they use in their institutions with their peers through Exchange’s network. To participate in our next Lenders Corner forum, email us.
In mid-August, Exchange held a special edition Lenders’ Corner Forum to look at how BRAC Bank uses a number of tools and procedures to successfully manage its credit risk. This case study is useful for other banks, as BRAC used the tools to double its loan portfolio in 2008. Specific topics covered included how credit risk management functions within each major business unit; major credit risk reports that management reviews; the Impaired Asset Management Division; the watch list; and portfolio review procedures.
Quick Lessons
Maintaining good credit quality is a core principle for our institutions as the market begins to improve. The twin aspects of credit culture and credit consistency are necessary to uphold good credit quality.
Reporting tools such as PAR reports, watch lists, and other reports by business, region, and borrower can help strengthen an institution’s overall credit culture.
Solid training of employees in their roles and responsibilities, along with providing information on tangential departments such as the impaired asset management group, can help promote efficiency between departments.
Given the tenacity of the worldwide financial crisis and the continuing fallout from it, the July Lenders Forum dealt with one common issue that financial institutions are increasingly facing: a sudden surge in delinquent and problem loans. Participants shared that using frequent and thoughtful communication with both borrowers and loan officers can help flag early problems or understand trends in delinquency better.
Quick Lessons
Usually a surge is not immediate, and there are a number of reports—other than the normal delinquency reports—that can serve as indicators. They include exception reports, portfolio reviews, and early warning reports.
Institutional responses to delinquency should remember to incorporate the feedback from its ground-level officers, communicate the policy effectively throughout the institution, and create incentive structures to encourage lending to those who will repay.
While stopping lending may be the most effective immediate response, institutions should use the crisis to develop and implement better long-term policies that will prevent a similar situation in the future.
This discussion focused on how banks can successfully navigate credit risk challenges during the financial crisis. The financial crisis is affecting microfinance institutions (MFIs) and small business banks across the world, with specific heightened impact in the sectors of export, tourism, and services. Banks are seeing borrowers pay back loans more slowly and some have seen delinquency rates rise. The group discussed specific examples of how their institutions are coping with the crisis.
Quick Lessons
Successful practices, as discussed in this call, in coping with these trends include: 1) balancing caution in making loans with mission to give loans; 2) working very closely with borrowers who may become delinquent or who are delinquent and understanding their motivations; 3) making sure the message between management and loan officers is consistent and reflects what goes on “on the ground.”
There are different types of borrowers—those who can’t pay but want to; those who can pay but won’t; those who can’t pay and don’t want to—and that delinquencies from different types should not be treated the same.
A Lenders’ Corner Forum was held in late June 2008 which examined a ‘hot topic:’ the issue of compensation and incentive systems, especially as they relate to lenders. The participants discussed essential operational details of their systems that conveyed useful takeaways. SCE is hoping to develop a compensation incentive toolkit and will engage participants in the process.
Quick Lessons
How organizations define their incentives to lenders and how the lending function is structured are both critical inputs into the institutional incentive system.
One thing to think about is incorporating measures that are not too burdensome to measure and track. It is often more effective to have quantitative measures and then incorporate only a few qualitative measures into the system.
On January 17, 2008, the Lenders Corner Forum explored screening of clients for general creditworthiness and acceptability. For those institutions engaged in small business lending and those who combine small business lending with individual microfinance lending, screening has become more germane as the fallout from the US ‘sub-prime’ crisis continues to make headlines.
Quick Lessons
Screening is the first step in the loaning process, and is typically handled one of two ways around the world. Some banks have a dedicated screening officer, while others include it in the loan officer job.
It is important for the institution’s image that the person who is the “screener” should be empathetic, concise, organized, and professional. One virtue of screening is that people appreciate being told quickly that they are ineligible before going through the lengthy loan application process.
In the screening process, banks cited that the most commonly used elements to check in screening are simple debt service coverage ratio (for small business loans), installment ratio (for individual loans), and monthly sales and business/ family expenses.
The most recent Lenders’ Corner Forum, held in April 2007, focused on identifying problem loans. The group discussed experiences on how their institutions analyze a customer’s financial position, evaluate delinquent loans, and respond to delinquency. Participants also shared lessons from handling loans that turned delinquent. One of the tools shared as a result of the call was a monitoring tool that could be easily customized to individual institutions.
Quick Lessons
This call focused on using loan rating systems to qualify the level of risk on loans. The group shared insights on rating systems used by their individual institutions, on rating restrictions by central banks, how to account for payment history, cash flow performance, and the importance of building quality customer relationships.
Quick Lessons
This phone forum focused on approaches to creating a careful but fair credit culture. The group shared insights on key benchmarking ratios, common pitfalls around lender’s judgments on customers, specialist areas for lenders, and debt collateral.
Quick Lessons
This call discussed portfolio monitoring and its role in maintaining a healthy portfolio and curtailing potential losses. The group shared insights on monitoring frameworks and lessons learned from monitoring and reporting.
Quick Lessons
This forum focused on the appraisal of management, and formal and informal tips and tools. The group dwelt on the issue of “red flags” – tipping points which should be tied to a specific circumstance that experience has taught us has a high correlation with bad loans. The moderator tied tipping points for management evaluation to four major areas: supervision, cash flow management, weaknesses, and flexibility and adaptability.
Quick Lessons
For the first Lenders’ Corner phone forum, a case study format was used. The group evaluated a pre-circulated case and discussed loan analysis and borrower characteristics, ending the call with a summary of bigger takeaways.
Quick Lessons