RiskCredit RiskCommercial Lending: Changing Risks and Business Controls in a Competitive Market

Commercial Lending: Changing Risks and Business Controls in a Competitive Market

European commercial lending has gone from strength to strength in terms of competitive growth in the past five years, in particular in the small and medium enterprise markets. Coupled with this growth has been the increased appetite and necessity for taking greater risks, both to protect and to increase profit margins among the banking community. Risk is not just an internal concern as the evolving nature of external risk has also been highlighted in 2007 with the global knock-on effects of the US sub-prime mortgage crisis. To what extent the credit crunch will affect the wider global economy still remains to be seen. What is clear, however, is that there needs to be a stronger emphasis on risk analysis tools, which are becoming crucial to commercial lenders as the industry not only becomes more competitive but also has to comply with regulatory initiatives and an increasingly uncertain global market place.

Risk Analysis Provides Growth in Commercial Lending

A recent Financial Insights report ‘Commercial lending – no longer the neglected step child’ investigates commercial lending and its growth over the last five years. The report found lending to European corporate customers has provided one of the biggest growth areas for banks in the past five years, in particular in the small and medium enterprise markets. However, commercial lending is fast becoming a commodity, with shrinking margins and decreasing customer loyalty. With commercial lending continuing to grow so too does the appetite for risk taking. Lenders are being forced to become hyper competitive, protecting and increasing profit margins, and jostling for decisive client wins.

If commercial lenders are to be successful in taking higher risks, far greater levels of data accuracy, analysis, process transparency and risk modelling are required. To date, small and medium-sized commercial lending operations have struggled with regards to risk modelling. Unlike the larger operations that often have greater risk-focused technology at their disposal, small and medium-sized lending operations struggle to refine their risk outlook. An example would be best case forecasting, with regards to pricing, which has historically proved to be less accurate and insufficient for regulatory compliance.

Automating Commercial Lending

As commercial lending continues to grow so too does the volume of transactions, which is a key consideration for operational risk and the ensuing regulatory initiatives. To meet these requirements commercial lenders need systems that are able to handle the associated administration. Automation is crucial in capturing the process structure that has to be followed through the full loan cycle, decreasing the dependence on people, reducing the risk of human fallibility as well as increasing transparency and auditability. While regulations such as Basel II are often seen as a burden, they can actually act as a differentiator that will allow smaller and medium sized commercial loan operations to compete more effectively against the bigger players.

As previously touched upon, commercial lending departments, particularly within smaller and medium-sized financial institutions are heavily reliant upon manual processes. This causes problems in terms of the level of control the institutions management have over the commercial loan operations. There is increasing pressure, both internally and externally towards greater business controls that current basic non-automated commercial banking systems are unable to provide satisfactorily. Pressures for greater business controls are coming from three different directions: internal auditing departments, external auditing requirements and regulatory directives.

Commercial lending operations traditionally have issues with the quality of inputted data and the mechanisms for data validation, particularly within the loan origination process. If these processes are manual, transparency and visibility to ensure that the correct processes have been followed is threatened. This is contrary to proper due diligence within both internal and external regulatory requirements, and can lead to poor decision making and ultimately to a worse bad debt record.

Achieving greater control of loan processes has the potential to allow commercial lenders to apply business rules in a consistent manner and ensure that quality controls are maintained during the entire lending process. Greater workflow control ensures authorisation checks are met and there is audibility and traceability of the entire lending process. Alongside this, well-placed business controls can assist in external and internal reporting, help in the prevention of fraud and minimise poor quality lending.

Overall, the achievement of greater business controls and loan management automation provides senior management with a more reliable source of data on which to make quicker and more informed strategic decisions. Better quality data enables risk models to provide improved accuracy in their risk projections and portfolio management.

Commercial Lending in 2008

The most voiced industry issue in the latter half of 2007 and the beginning of 2008 has been the deepening credit crunch. In what way commercial lending will be affected, remains to be seen. However, the credit crunch has served to further highlight the necessity for adequate risk mitigation and business controls. With purse strings continuing to tighten, commercial lenders must ensure their risk ratings and pricings are based on authoritative processes and high quality decision-making.

Comments are closed.

Subscribe to get your daily business insights

Whitepapers & Resources

2021 Transaction Banking Services Survey
Banking

2021 Transaction Banking Services Survey

2y
CGI Transaction Banking Survey 2020

CGI Transaction Banking Survey 2020

4y
TIS Sanction Screening Survey Report
Payments

TIS Sanction Screening Survey Report

5y
Enhancing your strategic position: Digitalization in Treasury
Payments

Enhancing your strategic position: Digitalization in Treasury

5y
Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation

5y