It’s Time Again...Are Your Policies Ready?

In May, I had the opportunity to speak at the Independent Bankers Association of New York State conference. There were several speakers and varieties of issues were discussed. Regardless of the topic, all the speakers agreed on one thing-we are looking at an economic downturn in the near future.

A downturn can mean many things for a financial institution including:

• Revamping the Special Assets Group
• A rigorous review of risk rating distribution across the portfolio
• Review of loan loss allocations
• Additional credit training for Relationship Manager, Credit, etc.

At the conference, my topic included a discussion around the need for a sound lending policy. Those of you that have worked with me in the past know I LOVE policy. A good policy makes for good lending. A bad policy, well, makes for the potential of poor lending decisions. While you can never fully eliminate risk, a good policy should help anticipate where risk will occur and limit it appropriately.

Part of a sound lending policy is the importance of reviewing policy on a regular basis. We often update a section of policy, but when is the last time your financial institution:

• Asked every lender to read policy?
  • While I say lender, everyone should read and understand policy. Credit, Operations, everyone. The depth of knowledge will vary by role, but there needs to be an understanding.
• Had Credit Admin read the policy from beginning to end to ensure consistency?
  • We tend to update sections of policy, so it is easy to forget to ensure that the entire policy flows together. When I visit clients, I read their policy. It is not unusual to find sections contradict each other. Which also leads to the next bullet;
• Verified that policy and procedures agree?
  • On many of my client visits when I discuss policy, it am told, “procedures are different. We do it this way.” Policy and procedure have to agree. Think of policy as the rules; procedure says how you will fulfil those rules.

As you think about policy and potential adjustments and updates, also consider the importance of analysis levels by segmentation and proactive portfolio management. Does a smaller loan relationship really require three years of financial statements and accounts receivable monitoring? Could this type/size of loan relationship be done in a more streamlined fashion? Remember, just because you require and/or analyze financial statements during origination does not mean there will never be issues with the portfolio. What are you doing about on-going portfolio management? How are you proactively managing your portfolio? What behaviors are you monitoring? What happens if there are deterioration in a relationship but the loan is still current?

Start today to think about what steps are needed to prepare your financial institution for the inevitable economic downturn. Do not wait until the delinquencies start – and do not forget about policy!