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Lending & Credit Risk

Measuring Loan-Portfolio Credit Quality

Abrigo
July 27, 2016
Read Time: 0 min

All financial institution personnel play a role in the maintenance of positive asset quality through loan portfolio management, especially during periods of growth. The credit process inherently has risks. But as the OCC instructs examiners in its Comptroller’s Handbook, loan portfolio management is the process by which these inherent risks are managed and controlled.

In a recent poll, bankers seem to feel lukewarm about their ability to measure and interpret their credit quality. When asked, “How confident are you in your ability to measure and interpret your financial institution’s credit quality,” only 10% of bankers answered that they felt “very confident.” A majority of respondents fell somewhere in the middle.

So the question is, what can institutions do to get a better handle on the credit risk within their loan portfolio?  Here are two suggestions:

 
 

Make more informed lending decisions.

Request more information

Update and manage loan documents

Once a loan is booked and distributed to a loan officer, consistency in management, tracking, and updating important documents and covenants is critical. A common indicator of future credit risk is a borrower's failure to submit updated financials. Centralizing processes for tracking these, and other critical loan documents, through an automated software solution provides standard practices, improves efficiency, and reduces the likelihood of human error. For example, many institutions use a tickler system to request updated tax returns for borrowers. An automated system providing a global view of borrowers can ensure only one request for the updated return is sent to a borrower with multiple personal and business loans, and it can generate exception reports automatically.

Improve the stress testing process

Stress testing is a tool to generate a more complete picture of the institution’s credit risk profile and to control the risk. Many institutions hear "stress test" and think, "That’s not me, because I’m not required to under Dodd-Frank or because I don’t have a concentration in commercial real estate or construction." The reality is that stress testing is a best practice to proactively manage risk within your portfolio. In addition, using an effective stress test is also an excellent way to forecast issues that may impact your allowance as well as your capital ratios.

About the Author

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. Make Big Things Happen.

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.

Make Big Things Happen.