Rain or shine, expect the unexpected in commercial lending

"The time to repair the roof is when the sun is shining,” said John F. Kennedy in his State of the Union address in 1962. More than 60 years later, this reminder to prepare for any eventuality rings truer than ever for banks and other commercial lenders.

As clouds gather over the global economy, it’s hard to know what to expect from the next 12 months. With credit risk back on the rise and interest rates still climbing, the market can change more quickly than the weather. Today’s creditworthy business borrowers could easily be tomorrow’s defaulters.

The trick for lenders is to always expect the unexpected. Although you can’t stop change, you can anticipate it and assess its potential impacts. But first, you need to make some essential fixes to your commercial lending systems and prime your credit risk management infrastructure to help you achieve three key objectives.

1.     Know your borrowers 

In these uncertain times, it pays to take a deeper look at your commercial customers’ businesses. How is their balance sheet constructed? From where do they derive their profits? What risks are they especially sensitive to? Are they among the strongest or the weakest in their sector?

Critically, the latest credit assessment software can help you not only dig into a firm’s financials and KPIs, to determine its current position, but also measure its capacity to withstand future shocks, however unexpected.

You can stress-test any parameter to see how a change might affect the firm. For example, would another rise in interest rates increase the probability of default? Technology can rapidly answer questions like this and help you regularly reassess the situation.

But you also need to know how much a default would lose your business, or what you could get back from collateral. In other words, it’s critical to gain an up-to-date and accurate view of your exposure to each customer – how many loans they hold with you and to what level those loans are secured.

The more quickly you can liquidate collateral, the better price you’ll get for it in the market. And with the right credit assessment systems and processes in place, you can make faster and better informed decisions in response to a default.

2.     Understand your portfolio 

Now you know what risks you face from individual customers – but what about your portfolio as a whole? Could issues with one business affect another?

Contagion of this kind is a big concern at the moment. When Silicon Valley Bank (SVB) collapsed in March – and many banks’ share prices plunged in Europe soon after – the fear was of a domino effect throughout the banking system.

In reality, one of SVB’s biggest issues was concentration risk, as most of its business came from technology companies. But the main lesson learned is that lenders need to keep on top of risks to their loan books, such as the vulnerability of particular sectors to interest rate rises.

So, does your commercial lending technology give you a complete, consolidated view of your firm’s exposure – and the tools, again, to show the impact of market shocks to the portfolio?

If not, now’s the time to rethink your credit risk management systems and processes.

3.     Control the risks

Whatever happens in the market, your credit policies should protect you from spikes and shocks by keeping your customers accountable for repaying their debt.

But defaults can easily happen – and by digitizing your credit policies, you can strengthen your monitoring processes and keep a closer eye on any issues.

With rigorous qualification criteria for new business and renewed focus on internal limit management, a robust, modern loan servicing and credit monitoring solution will give you the real-time visibility you need of your business customers and their ability to make repayments.

By monitoring both covenant adherence and non-traditional data sources like news feeds, you can also get early warning of potential problems before they happen. That could mean alerts to not only concerning payment behavior but also events like a sudden selloff of stocks by company directors.

With automated workflow triggering responses to these events, you can make sure the right people are reacting to the data in the right way. Knowledge is power – and puts you in greater control of risks throughout the lending life cycle.

Weather the storm with digital commercial lending technology

The macroeconomic weather may already have turned but it’s not too late to start protecting your business from the worst conditions. 

Whatever steps you take now to reinforce and update your credit risk management infrastructure will pay off in the future. Above all, it will make the fallout of the most surprising market shocks easier to handle.

Unexpected, maybe – but unmanageable, never. So, in all weathers, you’ll always be sheltered from risk.