Given the tenacity of the worldwide financial crisis and the continuing fallout from it, for the upcoming Lenders Forum we will deal with one issue that many financial institutions are increasingly facing: a sudden surge in delinquent and problem loans. This call focused on Asian institutions.
With or without a financial crisis, growing banks can, at times, encounter a surge in delinquent and problem loans. Some successful banks have learned to use reports as indicators that a surge may be occurring or about to occur. Using frequent and thoughtful communication with both borrowers and loan officers can help flag early problems or understand trends in delinquency better. 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.
Usually a surge is not immediate; the number of delinquent loans in your portfolio is not going to go from 5% to 20% in one month. Thus, there are reports that banks can use as indicators – other than the normal delinquency reports (30, 60, 90 day late payments). Although some institutions are afraid to stop lending, sometimes that is the best “next step.” There may be a negative reaction by clients, but if it’s in the best interest of the bank then ultimately it will help borrowers, too.
A second institutional approach is to improve the incentive schemes. Institutions can also change the approval process, adding a layer of approval for larger loans. This may add a few days on the loan approval process, but it also works to mitigate risk. Some institutions use a “credit committee” to approve larger loans. Finally, incorporating feedback from the field level can help 1) create better policy throughout the institution, and 2) improve compliance by increasing buy-in. Finally, during a crisis there is the tendency to reduce or stop site visits, but those are very key tools that can actually encourage repayment and institutions should cease visits.
