Using the right software to oversee the commercial credit monitoring process
By Zubin P. Mehta
While using a wrench to hammer in a nail may work some of the time, it will not work all the time. Especially, if it is a delicate job and you don’t want to risk bending the nail. So why do some banks use a paper-based process to manage their commercial loan portfolios, a task that may clearly be one of the more important and fundamental parts of the commercial credit process?
Based on Global Wave Group’s research and a sampling of 50 banks in and around the Western states, banks are using everything from a manual paper-based process to Excel to their core banking system to manage their commercial loan portfolios. While in some cases this may work for the short term, it doesn’t position the bank for long-term growth, nor does it help when the regulators require details.
What is loan portfolio management?
Commercial loan portfolio management may mean different things to different people. The ability to track various components of a commercial loan—from reporting requirements to covenants and conditions and other data metrics—are all part of the process. While all banks are managing their commercial loan portfolios at some level, not all banks achieve the appropriate level to satisfy their internal operating procedures, their board or their regulators.
Prudent management of the entire commercial loan process requires consistently completing the following functions:
1. ensuring a solid customer database of information as a basis or baseline;
2. ensuring the flexibility to not only capture data but also extract/report on data for ongoing use;
3. obtaining a multi-dimensional view of your customer, loan and portfolio;
4. generating output at various levels–customer officer, branch, division, bank, etc.; and
5. having the ability to generate timely letters and emails for compliance and communications purposes.
Some banks argue, that based on their volume, they are able to track their commercial loan portfolios in a manual or a paper-based format. The question then is: How long can it be sustained? The right time for a bank to automate, is when managing its commercial loan volume manually prevents its loan officers and managers from completing other tasks.
In order to have effective commercial loan portfolio management, banks need to review the process by which they will track their loans. This begins with the loan agreement. The conditions, covenants, ticklers, terms are all detailed within the loan agreement. This would be the best place to develop a categorical ranking of the items needed. It is especially important in today’s economic climate to be proactive in managing loan portfolios and not waiting to ask borrowers for documentation after they are due.
The items extracted from the loan agreements should be logically aggregated within a system that is specifically built to track these types of metrics. Often banks rely on their core banking platform to manage a critical component of the credit process, such as tickler and covenant compliance. Typically, core systems offer a limited approach to managing loan covenants with no automated schedulers and no ability to report from various levels of the portfolio.
Currently, a number of software systems in the marketplace can help banks better manage their loan process, some of which work well but others much less so. The following are types of software banks can use to manage their loan portfolio:
– Excel spreadsheets,
– Outlook scheduling modules,
– core banking systems,
– third-party tickler systems, and
– proprietary systems.
Selecting the most appropriate software for your bank will take some analysis. First, determine the business need. Define the steps in the process of managing your bank’s loan portfolio that are the most critical. Then rank those requirements to ensure a priority is established. Banks are quick to jump into a technology solution. Rather, the requirements and processes of the bank are most important. Map and document those, and then weigh them against the proposed technical solution. This will save a tremendous amount of time and money after a software product has been implemented.
Second, evaluate vendors that specialize in tickler systems. These vendors typically have additional functionality over other software providers that do not specialize in tickler tracking and covenant monitoring. Evaluate whether the software has the ability to create schedules, waive items, create step-up/step-down covenants, generate reports, interface with core banking solutions, etc.
By matching the bank’s unique requirements to the software product, the bank will have greater success in implementation, adoption and usage of the new platform.
Using the right “tool” for the specific job is as important as having a well thought out credit policy. By having the right type of technology, a bank can provide better insights of the portfolio to all levels. Better software will help banks detect loan performance and compliance problems early.
Zubin P. Mehta is president and CEO of Global Wave Group LLC, a company in Aliso Viejo, California that provides commercial loan portfolio management software products and services.