Shifts in interest rates and the risk of default paired with the deposit crunch in 2023 and 2024 have made it more important than ever to focus on credit quality. As financial institutions keep an eye on lending challenges affecting both supply and demand for capital, demand from borrowers is well off the robust pace of lending many financial institutions saw in 2022.
The good news is that lenders are optimistic that lending activity will pick up later this year or early in 2025. Even though the optimistic outlook for rate cuts has waned slightly, some forecasters still expect at least one and perhaps two rate cuts of 25 basis points by the end of the year.
The CRE landscape is under the microscope, and lenders will continue to watch closely in the months ahead. However, CRE isn’t the only risk in your portfolio. While the community and member focus of a credit union creates a buffer, the financial institutions that take time to fine-tune their credit administration processes will be set up for success no matter how the market shakes out.
Ramp Up Credit Capacity, Not Risk
Though no one knows for sure when, rate declines will eventually come. When they do, loan demand will inevitably follow. Strong credit administration is the foundation for more efficient lending operations throughout the life of a credit — from originating and underwriting a new loan to annual reviews of existing credits.
Reviews of existing borrowers is a key area of focus for credit administration, and it’s top-of-mind for risk management leaders. Ensuring team members are equipped with the tools and policies they need to pursue loan accommodations or workout scenarios as appropriate is more important than ever, given the ongoing stress in the CRE space and the wave of property debt set to mature over the next three years.
Credit unions should consider conducting an audit of their credit administration functions. Pinpointing areas and processes that could be optimized will empower analysts to uncover both hidden opportunities and risks within the portfolio, regardless of interest rate and other economic volatilities.
3 Ways To Empower Your Credit Department
- Establish Clear Expectations And Policies: Everyone on the credit administration team needs to understand their roles and responsibilities as it relates to managing risk and growing the portfolio. Starting at the top, clearly define the levels and types of risk your credit union is willing to take on to achieve its goals. When team members are cognizant of the institution’s goals and risk capacity, they are more equipped to make informed, strategic decisions that align with the credit union’s policies — whether pushing a new credit request through underwriting or dealing with a distressed account that’s up for review. This is the first step toward creating a strong credit culture.
- Eliminate Friction: There are countless tasks and touchpoints associated with any given loan request, often involving input and collaboration from multiple team members. Identify where there are pain points or cracks in key business processes. For example, are credit exceptions or loan documents challenging to manage? If so, it might be worth investing in tools that help track and manage those to ensure nothing falls through the cracks.
- Invest In Professional Development: It’s not enough to rely on general market trends and reports without digging deeper into other underlying factors that might impact a borrower and, ultimately, the financial institution. Each borrower faces unique challenges and opportunities, many of which might not be initially apparent. Make sure credit administration staff understand how to assess relevant external factors, such as labor shortages or supply chain issues, and how they could impact a borrower’s cash flow. Train team members on ways to identify less obvious risks. For heavy portfolio concentrations, credit unions might opt to delegate analysts who have a specialty in those concentrations or deal types. These experienced, specialized analysts can share their knowledge or even serve as mentors, spreading their expertise to more junior team members.
While loan demand remains sluggish and headwinds persist for certain sectors of the CRE space, now is the time for credit unions to evaluate their credit operations. Identifying and addressing pain points or gaps in your business processes now will pave the way for more stable and profitable portfolio growth in the future.
Baker Hill is in the business of evolving loan origination by combining expertise in technology with expertise in banking. Baker Hill NextGen® is built on decades of walking alongside banks and credit unions as they provide vital resources to their communities. A configurable, single platform SaaS solution for commercial, small business, consumer loan origination and risk management that grows along with you as your business needs change, Baker Hill is lending evolved.
