In the wake of one of the most profound financial crises in memory, United States regulators have implemented stringent rules in regards to business loans and the risks associated with lax lending policies. This is a delicate situation, for banks need to remain solvent and to provide the liquidity to small and medium-sized businesses that can help prime the economic pump, but they need to do so in a way that mitigates the chances of borrowers defaulting on these loans. Thus, examiners are now inspecting a larger number of loans and studying the internal underwriting standards of the banks themselves.
While this oversight is seen by many as completely understandable, some banking institutions may be uncertain how to balance lending risks with profitability. One of the first aspects to appreciate is the fact that individual lenders need to be provided with a more robust and transparent understanding of credit training. While book knowledge may offer a rudimentary appreciation of the concept, on-the-job training and poor lending criteria can cost the bank millions in losses. Therefore, lenders new in the industry need proper mentoring while being presented with real-time simulations designed to sharpen their discriminatory lending skills. This experience can be invaluable in helping institutions determine which loans represent a safe venture and which ones should be considered too risky to approve.
While training is important, banks also need to balance this training with a broader understanding of what their customers need. Much of the preconceived methodologies have greatly changed in the last few years and so must the approach to clients be similarly modified. For example, business customers have a much higher likelihood to switch lending institutions than in the past. Borrowers seek more of a financial partnership than merely an institution that oversees their capital and loans. These first two variables will prove dependent on whether or not a bank understands the needs of the small business and approaches the relationship with clarity and insight. As mentioned in the previous paragraph, this talent will arise through proper training and a discreet knowledge of the lending environment. This transparency must also be reflected in the pricing; customers are highly aware of any nuances and may switch lenders. Above all, consistency, transparency and trusted interpersonal relationships are required for banks to retain their clientele in these times of heightened regulations and high risk.
It is a foregone conclusion that regulators will continue to clamp down on lending policies into the future. Although banks have little choice other than cooperating, following this handful of previously mentioned principles can help ensure compliance as well as customer satisfaction.
Tim Aldiss writes for Omega Performance – the place to go for credit training.