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Lending & Credit Risk C&I Loans CRE Lending Credit Risk Management Loan Pricing

5 Inefficiencies Community FIs Must Resolve to Prepare for Economic Uncertainty

Kylee Wooten
March 13, 2020
Read Time: 0 min

Key Takeaways

In today's uncertain economic climate, community financial institutions must resolve to manage risk and drive growth.

  1. Gather documents more efficiently and consistently
  2. Prevent entering the same data multiple times or in multiple places
  3. Accelerate loan turnaround times
  4. Price loans profitably
  5. Manage customer relationships effectively

Importance of overcoming lending inefficiencies

The coronavirus has sent shockwaves through the markets around the globe. To mitigate disruption to the economy, the Federal Reserve made its second emergency cut to interest rates on Sunday, marking the largest emergency reduction in the Fed’s history. Low interest rates and slowing growth in loan demand can put community financial institutions in a difficult position. Eliminating lending inefficiencies and mitigating any increased risk should top the priority list for community financial institutions across the country.

Abrigo’s 2020 Business Lending Readiness Survey identified a number of pain points that thwart business lending growth, from document gathering to lengthy loan turnaround time. Here are the top five lending inefficiencies holding community financial institutions back and how to overcome these challenges to stay competitive in an uncertain economic climate.

Wrangling documents

One of the largest inefficiencies in the commercial lending process, according to respondents, is the ability to gather documents efficiently and consistently.  

A key contributor to this issue is the lack of a clear, consistent credit policy. “The more leeway there is, the higher the likelihood that staff will need to go back to the borrower for information,” said Alison Trapp, Director of Client Education at Abrigo.

Community financial institutions should develop a clear credit policy outlining expectations and application requirements. Community financial institutions may also consider leveraging technology to make it easier to collect and track documents, as well as notify borrowers of missing items.

Compare your institution's loan turnaround times to other banks and credit unions.

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Manual data entry

When financial institutions use disparate systems, staff must repeatedly enter the same information, wasting time and risking costly data entry errors. Eliminating data re-entry should be a top priority for institutions that want to eliminate lending inefficiencies and unnecessary risk.

To do so, leverage an online loan application. It reduces the back and forth to help manage the document gathering process, as well as eliminates data entry for lenders. Financial institutions benefit from a single point of data entry, where that information can easily flow through to other applications, such as financial spreading and analysis, rather than being entered manually in another system.

Slow loan turnaround

Wrangling documents, manual data entry, and other inconsistent and time-intensive processes make it difficult to get an answer back to borrowers or members quickly. Only 7% of respondents said that their institution could turn around within a week.

To solve this issue, community financial institutions are turning to automation. Automation can pre-populate fields and trigger notifications so nothing falls between the cracks. Furthermore, automating the workflow can help streamline and track the progress of the loan by using notifications to prompt next steps, reduce bottlenecks, and document the process for better auditability.

Pricing loans profitably

Financial institutions – community financial institutions in particular – walk a fine line with loan pricing. On the one hand, institutions want to be competitive and earn more business; on the other hand, institutions must manage risk and price loans according to the risk that they are taking on.

The largest group of respondents answered that they set prices on loans based on lender discretion and client negotiation. This is concerning to David O’Connell, Senior Analyst at research firm Aite Group, who noted that the margin for error on loan pricing is “almost nil” with spreads so thin right now.

In this increasingly competitive environment, and uncertain economic conditions ahead, banks and credit unions must make informed pricing decisions that accurately capture costs of administering the loan and assuming the risk of the borrower or member. Today’s technology allows financial institutions to integrate loan pricing, credit analysis, and risk rating software to save time, improve efficiency, and quickly generate reports to justify pricing decisions.

Managing customer relationships

Over half of respondents reported managing the institution’s borrower pipeline through Excel spreadsheets or using individual tracking methods. These approaches miss out on vital management information.

“You need operational analytics,” O’Connell said. “You want to know things like, how long is it taking us to do a CRE deal? If it’s two weeks longer than C&I, that makes sense. But maybe you’ve got one team of lenders closing loans 1.5 weeks early, and maybe they’ve got underwriters embedded in their team. If you’re [managing the pipeline] in Excel, you’ve ceded the opportunity to do operational analytics.”

For greater operational analytics and transparency into the borrower pipeline, financial institutions are using relationship manager technologies that aggregate all customer information into a 360-degree view of each customer and loan. This technology helps financial institutions to centralize all customer engagements, accurately report on the institution’s lending pipeline, and track all open opportunities.

To learn more, download the full report from the 2020 Business Lending Readiness Survey or join Abrigo experts on April 7 for a complimentary webinar, "Breaking Down the 2020 Business Lending Readiness Survey: Roadblocks to Top Results."

About the Author

Kylee Wooten

Media Relations Manager
Kylee manages and writes articles, creates digital content, and assists in media relations efforts

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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