The Secret to Loan Growth in a Slow Economy

Higher interest rates are here to stay and while experts anticipate additional rate hikes in 2023, the biggest rate increases are likely behind us, according to Bankrate. While interest rates may not rise as sharply this year as they did in 2022, most bankers, many economists and analysts expect a recession sometime in the next 12 months.

Even if the economy slows down and loan demand continues to weaken, bankers can see strong portfolio and loan growth if they position their financial institutions properly.

Leverage Liquidity, Balance Sheet Strength

The good news is even if there is a slowdown, financial institutions are in a much stronger position than they were prior to the Great Recession of 2008-09. Banks in general have better liquidity and better balance sheet strength than they did 15 years ago. Credit quality has been good, and community banks are financially sound, with better reserves and an extremely low level of delinquencies. Additionally, customers have sounder finances themselves, and many have significant equity in their homes. Therefore, new lending opportunities may surface that have not previously been considered.

Some lenders tend to have a specific underwriting box – loans that don’t fit in the box don’t get written. However, community banks have the flexibility to work with their customers and figure out ways to get deals done that are just outside of the traditional box. The more community banks can extend that box, the more growth opportunities they’ll have. For example, sustainable lending is a relatively new area that is outside of most lender’s traditional lending business. By expanding into this market or another market that has shown to be resilient in a slow economy, community banks can carve out a specific niche for themselves to generate growth.

Be a Proactive Partner

With the new reality of rates going up and a slower economy, smart lenders will look for opportunities to solidify relationships with their existing borrowers. Proactively reaching out to customers to see how they are weathering the new realities of this economy will be very important in nurturing a strong relationship long-term. Focus on being a partner with the customer, not simply a lender.

Regularly communicate with customers who are more susceptible to stressed cash flows and credit quality issues during a recession to help them address any potential issues. By communicating early, you can help those customers prevent any credit challenges before they escalate. The sooner a banker understands what impact the recession is having on a customer, the easier it is to help. Oftentimes, a customer will experience issues with cash flows or the terms of their loan, but does not communicate early enough to their bank. As a result, issues tend to get bigger and are often harder to resolve before a loans becomes delinquent. The bank can minimize the issues by proactively reaching out and communicating with customers.

Empower Your Employees

The last true cyclical recession occurred in 2008 and 2009, so lenders who have entered banking in the last decade have never navigated a recession. Meanwhile, many community banks are struggling to recruit experienced lending and risk management personnel. As a result, some financial institutions may find it challenging to mitigate risk and adjust their lending strategies amid an economic downturn.

It’s also difficult for many community financial institutions to be proactive when managing risk because gathering and analyzing the right information from several different systems and workflows is time- and resource-intensive. This is especially burdensome for financial institutions with lean teams.

The good news is an LOS with an embedded portfolio risk management system that facilitates continuous, proactive portfolio monitoring can help your institution address problems in the portfolio before it’s too late. Empowering your team to more proactively monitor for indicators that a borrower may be struggling will allow them to step in and give attention to the accounts that need it, ideally before a missed payment.

Maintain Strong Portfolio Performance & Even Stronger Customer Relationships

With rising interest rates expected to slow the economy, as well as weaken the demand for credit, community financial institutions face an uncertain lending landscape. However, forward-thinking financial institutions can follow the steps above to maintain strong portfolio performance and even stronger customer relationships, despite these economic headwinds.

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Author Bio

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships.

Streamline business, consumer direct and indirect lending with our common origination platform. Understand profitability and risk at every level with our sophisticated business intelligence and analytics. Monitor and maintain a healthy financial portfolio with our statement analysis, exception, and risk management solutions.

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