Reengineering Commercial Credit
Years ago, when anyone wanted a commercial loan, there was basically only one place to go - a bank. As such, banks were able to take their time with the loan approval process, given that they had no competition except other banks, which had equally lengthy approval processes. There was really no fault in the system either, since time did not seem to be at a premium back then. People expected to wait awhile before loans were approved. That's all changed in the l990s, though. Banks are competing against a number of non-banking entities (finance companies, stock brokers who make margin loans, etc.), and these entities are offering streamlined approval processes. "It can be difficult for some banks to keep customers," admits Dev Strischek,Executive Vice President and Senior Credit Policy Officer for Barnett Bank (West Palm Beach, FL) and a past president of Robert Morris Associates.
Like many other banks, Barnett Bank became involved in reengineering in the early l990s. In reengineering the commercial loan process, the bank was faced with three challenges:
- Improve response time.
- Continue to make correct and accurate decisions.
- Find new ways to reduce cost from the process.
"This is not an easy trilogy to achieve," observes Strischek.First, the reengineering team looked at some of the basic causes of slow response time and excessive costs. Two came to the forefront quickly:
- The process had a pattern of multiple decision and approval points (by individuals and committees) that involved substantial amounts of replicated information gathering, analysis and dissemination.
- The process also required a significant number of hand-offs and reviews within and between functions (credit department, lending department, and audit department).
Once the team began to get its arms around the basic problems, it divided the loan process into two areas. Small Deals
"We quickly realized that one of the major causes of problems with time delay was the fact that small deals were taking almost as long as large deals," reports Strischek. In many cases, they were also costing nearly as much. This:
- inconvenienced customers, who had to wait a long time for what ultimately amounted to simple loans, and
- compromised competitiveness for Barnett Bank, in that it often found itself having to charge relatively large amounts of money to customers in loan processing fees for small loans.
To solve the problem, the team recommended a credit scoring system for small commercial loans. "For a $40,000 loan, for example, we don't need to bother with the time and expense of five-year projections, a three-year history, and so on," notes Strischek. "Along the same lines, we began to realize that a lot of small commercial loans were actually similar to personal loans in many ways. In most cases, the businessperson is the personal guarantor, so we ended up basing the loan on a personal loan analysis, relying a lot on credit bureau reports and very little on financial statement analysis." This streamlined process now allows the bank to make most decisions related to small business loans within a day or two. Large Deals
Prior to reengineering the large commercial loan process, the team found several weaknesses in the existing system, based on the fact that the credit department and the lending department were separate entities and thus often didn't work together. The theory was that:
- The lending department would bring in potential business.
- The credit department would analyze the business and make a recommendation.
- Both departments would continue to learn from each other this way.
"In fact, the theory didn't always work this way," notes Strischek.
In many cases:
- The lending department would blame the credit department for being unrealistic in its recommendations, and then go ahead and make loans against the credit department's recommendations that often didn't make good sense.
- Because of the reputation the credit department gained for being too conservative, the lending department would often not even invite the credit department into the process until a loan was so far along that it almost couldn't back out. "At this point, if the credit department recommended against the loan, the lending department might just rationalize it and still go ahead with it," he states.
- On some occasions, the lending department might even cut the credit department completely out of the process.
- In many cases, the lending department would complain about the time it took the credit department to conduct an analysis, not realizing that one cause of the problem was not providing the credit department with complete and accurate information on which to make a decision in the first place.
To address these problems, the reengineering team recommended an equal team process for large commercial loans with credit and lending working together in partnership from the very beginning of the process. "Under this process, a lender brings in a deal, submits it to the credit analyst on his team, explains the deal, and the two of them shape it jointly," states Strischek. All deals now require signatures by the appropriate credit policy officer and the account officer. To reduce the problem of the credit department being too cautious, the team recommended an incentive program for credit department employees based on how productive the lending side is. Results
As a result of these initiatives, Barnett Bank is now able to process commercial loans quickly, accurately, and inexpensively. Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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