Looking at the phrase “risk appetite”, there is more to it than just looking at the types of loans the credit union is willing to lend money for. Step one would be to determine their market area and the types of industries it determines is a part of their overall risk strategy. Step two would be to establish on-going risk management to underwrite the credit and step three to establish effective portfolio management after a loan is made.
Step One: Determine the Market Area and Types of Industries
Once the geography has been established, determine what types of industries and businesses are part of this geographical area. Study these businesses to determine the potential risk of lending to any certain industry or business type. Are you going to concentrate on small businesses, larger C&I or CRE loans? Is your risk appetite for all of these types of loans? Also, research your current member base for those members who own businesses or are businesses. This will give insight into what your institution has as a potential business loan base.
Step Two: Establish Ongoing Risk Management
Determine your risk management strategies to underwrite the types of loans the credit union has determined it will offer to its members. Credit analysis will play a major role for any type of loan but determine the scope of the credit analysis based on the potential risk. For small business, analysis may be abbreviated to a consolidated financial statement and credit score where larger C&I and CRE deals may require more thorough financial analysis to determine risk.
Step Three: Establish Effective Portfolio Management
This step is often overlooked and is critical to the on-going business loan portfolio management. It’s common for management to hire top commercial lenders with the knowledge and background in business lending. However, it is critical to make sure that the support team, credit and operations have expertise in business lending. From analyzing business financial documentation from a credit perspective to loan documentation, compliance, loan servicing and portfolio management, it is important to maintain a high level of expertise specifically geared to business lending.
