January 19, 2011

It is true: The financial industry started feeling the effects of poor decision making and a desire for excess about five years ago. And now the federal government is trying to make sure that such a climate never returns. As the regulatory, political and economic tides continue to slap against the walls of financial institutions across the country, the effects are still unclear. One thing is certain: Change will be made. One business area that is sure to feel the effects of these changes is commercial finance. Here, three industry experts consider the effects of the aforementioned change and what are the significant challenges banks face with their commercial financing lines of business.

Prepare for an Upturn in Demand Robin Wantland, Managing Director and President, Highlands Bank (Dallas)

Finding viable small businesses to lend to is the biggest challenge facing banks. As it relates to the demand for credit among credit-worthy small businesses, demand is not as high as people think it is. The fact is, banks are having a hard time finding credit-worthy small businesses that want to borrow in our still-uncertain economy; they are just not willing to take the risk. The economy has driven consumers and small business into managing their expenses and debt levels more aggressively. Many are transitioning from being in debt to building a cushion of savings. While everyone is getting financially stronger and more stable through managing their debt levels downward, it is still a detriment to banks (which thrive on making profitable and prudent loans) and to reviving the economy. Conversely, there are also a number of unhealthy banks that cannot participate in providing credit to their business clients because they are so preoccupied with cleaning up their portfolios of sour residential and commercial real estate loans.

The healthy banks have plenty of opportunities to bring in more clients, and/or cross-sell existing clients that are unfortunately being ignored at the unhealthy banks. In fact, a well-capitalized bank is in an opportune position to pick up market share. To do this both effectively and efficiently, banks should look for a technology platform that will enable them to handle the increase in demand for products and services as the economy rebounds. I believe it will honestly be mid-2012 before we see a return to a more robust environment. The banks that enhance their technology platforms during the next 12 to 18 months will be able to take advantage of opportunities when the economy rebounds.

Consider Process Improvements Brian Shaw, CEO and President, Custom Credit Systems (CCS, Richardson, Texas)

Banks have an array of challenges in the commercial finance arena, but one standout issue is investing in the right opportunities, both from a lending and infrastructure perspective, while trying to understand when the uncertain economic seas will calm and how the landscape will look afterwards.

It is going to be hard for banks to attract, evaluate and monitor good credit opportunities since the environment for small business and commercial loans has taken so many different turns lately. Loan officers will likely continue having difficulty getting internal and external support for commercial lending from bank management until the number of quality borrowers increases, which, as history has taught us, will eventually happen.

In the meantime, it is extremely important for bankers to have a complete understanding of the ramifications of their commercial lending efforts for two primary reasons. First of all, garnering more complete, consistent and current information (the "three Cs" of data) about a borrower's character, capacity and collateral (the "three Cs" of lending) will translate into more confident decisions with a higher probability of repayment in difficult economic times. Additionally, good data will help lenders increase loan portfolios by sourcing new deals based on trends they see in their own portfolios or by more effectively cross/up-selling to their solid clients. Secondly, organizations that focus now on ensuring they have solid, quality and efficient processes will be best positioned to handle opportunities from both weak or failing institutions while economic conditions continue to languish and from new business needs as conditions recover. Therefore, the time is right for banks to consider process improvements and deploying end-to-end processing to address the following needs:

  • 1. Accessible data to help prevent credit crunch issues in the future. The key is implementing the technology before major shifts such as an economic upheaval or, more importantly now, economic recovery, occur.
  • 2. Informed focus to take advantage of lending opportunities and to move credit portfolios forward. Additionally, both credit-worthy and troubled borrowers would be easier to manage with this technology. It will make the risk managers more comfortable with associated risks because they can see the performance of the loans at any time.
  • If processes and quality systems containing complete, consistent and current data are not employed now, the industry may be doomed to repeat history in the future. Also, hesitation by bankers that halts forward progress on process and technology improvements because they lack confidence in the economy and political environments may end up costing more in the mid- and long term as a result of current quality-missed lending opportunities.

    Assess Risk at the Regulatory Level Richard Bowen, Professor of Finance and Accounting, The University of Texas (Austin)

    It is imperative for financial institutions to gather financial data and marry it with servicing and credit data. One of the biggest challenges facing them today is managing all the information so they can truly consider the risk allocation across their portfolios. Automation can help banks manage information processes. By using bank policy, servicing criteria and customer credit information banks can manage internal information more efficiently, which is important.

    In this rapidly changing environment all financial institutions need to assess risk at the regulatory level. That is crucial, and the proper use of technology can help with that task. Complete integration of data from all systems will allow each bank to track loans and compare information with its internal accounting procedures.