3 Ways to Establish Commercial Credit Policies that Drive Profitability

Commercial Lending

Credit is at the heart of most customer relationships. As many financial institutions continue their digital transformation journeys, it’s important to consider how digital transformation can be applied to commercial lending, a business which often hinges on the relationships a lender has with the borrowers in their local community. While these relationships are important to a financial institution’s portfolio profitability, so are the institution’s commercial credit policies and the technologies used to enforce those policies.

According to research from McKinsey, a financial institution with a $250 billion balance sheet could capture as much as $230 million in annual profit, with just over half derived from cost efficiencies. For instance, cost efficiency gains may include fewer full-time employees dedicated to manual data entry, which reduces operational costs and mitigates the risk of human error. Financial institutions also stand to achieve revenue gains by fine-tuning their commercial lending policies. Revenue growth can come in the form of increased loan applications, higher win rates and more.

The question is: how can financial institutions best position their portfolios for growth?

Below are three ways financial institutions can establish strong commercial credit policies and reinforce those policies with technology to support sustained portfolio profitability moving forward.

1. Play to Your Strengths

A financial institution may be focused on a specific type of lending, such as small business lending or a specific market, such as dental practices. In such instances, the bank’s expertise gives them a distinct competitive advantage for that market. For one, the bank’s business development and lending team can better identify the most promising prospects in the specific market compared to another bank’s team members, who may be less well-versed in the space.

Additionally, knowledge about a particular market or industry enables a financial institution to differentiate the level of service their team can provide. For example, lenders who are experienced in agricultural lending are more equipped to offer advice to industrial farmers to help them thrive. When lenders have experience in a particular niche market, they can more keenly understand the qualities, weaknesses, and potential opportunities affecting a potential or existing customer in that market. Therefore, financial institutions that have employees with niche lending expertise should play to that strength.  

2. Use Automation to Unlock Profitable Portfolio Growth

But, how can you give employees within your bank more time to build up and leverage those unique strengths? Automation is the answer.

Lenders burdened with the time-consuming tasks of manually underwriting and managing the portfolio will be constrained by the sheer volume of work and, as a result, will be able to carry fewer commercial accounts. By contrast, financial institutions that establish defined commercial credit policies can use automation and business rules to increase underwriting efficiencies.

Automation used in decisioning should always incorporate your bank’s credit policies to determine how each credit request should be reviewed. Baker Hill NextGenÒ supports multiple decision strategies, including scored, non-scored, auto decision, auto decision with manual review or always manual review.

For instance, many banks often choose to automate decisions for loans under a certain dollar amount. For larger, more complex deals up to a certain dollar amount, some banks may opt to use auto-decisioning with manual review. This approach enables financial institutions to manage business and commercial credit requests more efficiently, which in turn allows loan officers and relationship managers to focus on pursuing larger deals, rather than manually working on the minutiae of decisioning each credit application.

3. Prospect with Purpose

New business acquisition is important, but some customers cost more money than they generate for the bank or provide only marginal profitability. Meanwhile, this diverts resources away from efforts that could be dedicated to acquiring and retaining the bank’s profitable customers. Community financial institutions need a defined strategy for retaining their most valuable customers while attempting to shed the suboptimal relationships.

Good data and robust analytics can help your financial institution define its strategy. Analytics can determine profitability at the account, branch, region and enterprise level, as well as highlight the products and services that generate the greatest profitability.

The key is to make this pertinent information readily available to the commercial lenders and relationship managers who need it. A comprehensive CRM system that integrates with your institution’s commercial loan origination and portfolio risk management systems can address this need. An integrated solution, like Baker Hill NextGenÒ CRM offers greater visibility into client value and risk so that relationship managers can focus on the right opportunities. Ideally, your CRM will also flag high-risk clients who are more likely to churn and require attention.

Ultimately, the goal should be to make it easy for your institution’s team to capitalize on top-performing accounts and understand which commercial accounts or relationships need nurturing the most.

The Power of Aligning the Latest Tech with Commercial Credit Policies

Portfolio profitability hinges on much more than an experienced lending team, attractive pricing or a slick online loan application. While all of these are important factors, they are not the only contributors to a healthy bottom line. Instead, financial institutions should review their commercial credit policies and ensure those policies are backed with the right technology. When banks align their digital transformation efforts with effective commercial credit policies, they lay the foundation for loan growth that’s both profitable and sustainable.

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