When Annual Portfolio Reviews Aren't Enough

Commercial and small business lenders have had a busy year.

In the spring of 2020, many lenders were buried in processing applications for government stimulus funds. In mid-May, as stimulus funds dried up and the rush of applications was over, business lenders came up for air, knowing it was just a short reprieve. Then fall 2020 brought an onslaught of forgiveness processing. Now in 2021, financial institutions know more challenges lay ahead.

“Financial institutions have two urgent priorities when it comes to business lending”, says Vimal Stephen, head of product for Linedata’s business lending solution, “They want to make funds available to new and returning business clients to help tide them over until they can stabilize in the new normal. In addition, they must also secure the quality of their current loan portfolio.” Financial institutions have portfolio monitoring procedures in place, but compounding issues related to COVID-19 and a spiraling risk environment are requiring institutions to introduce additional measures.

“Oversight consisting only of annual portfolio reviews may be too little, too late during this challenging time. Yet financial institutions don’t have the capacity to keep a discerning eye on every customer and account. Automation is an ideal way to manage the portfolio without putting unrealistic pressure on the team,” Stephen says. With the support of software, it is possible to monitor the entire portfolio, focus attention on the accounts that need the most intervention, and thereby reduce the risk to the institution itself.

Linedata’s cloud-based commercial and small business lending software customers can now benefit from recent updates to the Portfolio Monitor module. The module helps institutions set up risk triggers, based on their risk appetite for specific subsets of their portfolios, which in turn detect early warning risk signals and process them based on the severity of the signals. For example, a financial institution can choose to be alerted if a customer payment is later than usual, but not yet late, to make a proactive check-in call. This allows financial institutions to get in front of potential problem customers and accounts and act with streamlined, consistent and scalable automation.

The financial institution has total control, setting its Portfolio Monitor thresholds based on its risk parameters and desired actions. While minor alerts such as a later than usual payment may trigger a quick phone call, other sensitive events such as an unusual deposit account withdrawal might trigger an unscheduled portfolio review. While individual alerts may only reveal so much, multiple and compounding alerts from different triggers might paint a more telling story of the underlying situation. Using these tools to uncover hardship a customer may be experiencing early, and proactively offering solutions such as a payment deferral, a modification or a restructuring of the loan could be key to securing the portfolio.

The Portfolio Monitor module offers benefits useful beyond just the current economic situation related to the pandemic. For one, annual reviews will be less manual and arduous as the software has been scanning across the customer’s portfolio all year. If there haven’t been any alerts, the accounts are most likely in good shape and there won’t be any major surprises. For the same reason, existing customers’ requests for additional credit can be fast tracked, without the need for an unscheduled review. “The module makes it possible to transform portfolio monitoring from a routine task to one that is more proactive. Our customers appreciate efficiencies now more than ever, and there is a lot of potential lift here,” Stephen adds.

Once a financial institution has stabilized its existing portfolio, it can evaluate new customers with a more informed perspective on enterprise exposure. 

“Ultimately, financial institutions want to continue supporting the community with business loans. Portfolio Monitor allows our clients to do the right thing by their customers, employees, community and shareholders,” Stephen says.