Portfolio Risk Management
in an Economic Downturn

Minimizing risk and maximizing opportunity within your loan portfolio is the goal of any portfolio risk management initiative. By getting a complete view of the credit and operational risk associated with a credit relationship or a portfolio segment, lenders can make better decisions. 

From there, monitoring and tracking can be made into actionable steps by leveraging internal and external data. 

• While helping clients to stay in business and gain needed capital is key, it is also crucial to monitor what is happening with your loan portfolio at a loan level, client level, and holistically.  
• Proactive portfolio management is not new, although it may be to your institution. As you move into streamlining requirements for loan requests using credit scoring, approving, and rewriting requests with stale tax returns, it is important to monitor the portfolio daily. 
• The challenge of monitoring risk continuously is that doing so manually is impossible and completely impractical. Not only does it rack up additional costs for the institution, but it leads to inaccuracies. 

Automating these processes helps alleviate these headaches, while also effectively and efficiently monitoring for risk. Plus, institutions are no longer relying on staff to manually input data – they can focus on other areas of the business.  

No one knows exactly how the economic forces will play out. But what we do know is that it will impact all parts of a loan portfolio. Financial institutions need to determine new tolerances of risk, determine which clients they can stretch for, and determine which standard credit underwriting items can be forgone for the time being. This can be done by analyzing the portfolio to see where there is room to negotiate and where there is not. 

As clients begin to reach out for assistance during the economic slowdown, it is important to have a strategic understanding of how your financial institution will respond to these requests.  

• Decide your financial institution’s tolerance for additional risk by identifying which industries or business types are you comfortable stretching your standard requirements. 
• Determine how to account for the additional risk. Choose if you are willing to forego full underwriting, financial statements, etc. and how will this impact your risk ratings and loan loss reserve. 
• Establish your non-negotiables. During this time, are you standing firm on your amortization for certain types of collateral or are you unwilling to accept the waiver of personal guarantees?

As clients begin to reach out for assistance during the economic slowdown, it is important to have a strategic understanding of how your financial institution will respond to these requests. Customer communication is more seamless through digital efforts, allowing them to trust the bank or credit union to guide them through an unknown experience. 

• Create a plan for communicating with clients. Are you proactively reaching out to clients or waiting for them to come to you? 
• Determine who will lead the conversation. Will each lender answer questions or should you centralize those conversations?  
• Coordinate information with borrowers, influencers in their markets like attorneys and accountants, and other community coalitions to help make sure everyone is on the same page as much as possible. 

If you don’t currently have an SBA specialist and are unable to hire one at this time, you can work with third-party vendors that specialize in SBA and other government guaranteed lending. With no in-house specialist, it is crucial to assign at least one employee, if not more, to the task of staying up to date on government programs and to coordinate with any third-party vendors. 

• The federal government is actively working to put out funds for small businesses across the US, and it is highly likely that the states are not far behind.  
• Understanding what options are available to your financial institution will be important to support your small business clients. 

It’s important to remember an SBA or other government guarantees cannot fix a bad loan, but it can help you to understand all the risks. 

Digital portals allow for secure uploads of financials and appraisals, along with other key documents. Processes like automated financial statement spreading will free up your borrowers time to focus on their urgent business needs while simultaneously providing you updates on a more frequent basis into the activity (or lack of) in your borrower’s financials – especially those small business borrowers. 

• Leveraging digital tools also allows for financial institutions to put the client first, responding to inquiries faster and providing their customers with peace of mind. 
• With a powerful customer relationship management system in place, you can stay appraised of what is happening in your borrowers’ businesses and be ready to have candid conversations 

With the sudden shift to remote work and contactless banking, it’s more imperative than ever that banks and credit unions invest in digital portals with expert partners.