8 Low-Risk Loan Portfolio Strategies For Banks In The Coronavirus Environment

8 Low-Risk Loan Portfolio Strategies For Banks In The Coronavirus Environment

In Commercial Lending, Featured, Small Business Loan Underwriting, Underwriting Automation by Yulia GnatyukLeave a Comment

Read time: 5 minutes


COVID-19 has pushed the economy into a recession. Unless a small business is applying through the Payroll Protection Program, banks do not really have the appetite to fund small businesses.  But if you assess the pre-COVID situation, commercial banks have been able to increase their loan portfolios massively over the last 5 years. With memories of the 2008-09 crisis not forgotten, banks have tightened underwriting standards but have also been able to leverage technology and new sectors like fintech lending to grow their balance sheets. The growth is demonstrated by the graph below. 

Value of loans of all commercial banks in the United States from March 2014 to February 2020 (in billion U.S. dollars)

8 Low-Risk Loan Portfolio Strategies For Banks In The Coronavirus Environment
Source: https://www.statista.com/statistics/214283/bank-credit-of-all-commercial-banks-in-the-united-states-monthly/

The governments are enforcing proven public health measures such as social distancing in order to physically disrupt the contagion. Their measures have in turn severed the flow of people as well as goods and stalled economies. The entire financial ecosystem, banks, businesses, industries, etc. are facing the brunt of the pandemic. The COVID-19 outbreak has pushed down economies around the globe in a deep trench. The head of the International Monetary Fund declared that “it is clear that the global economy has now entered a recession that could be as bad or worse than the 2009 downturn”.

But this is not the complete picture, the top 5 banks are now increasingly dominant and account for over 40% of the total loan portfolio. These banks are Wells Fargo, Citigroup, Bank of America, US Bancorp and obviously JP Morgan Chase. On the other side, digital fintech lenders powered by marketplace lending are increasingly encroaching on space once occupied by smaller banks and credit unions. This trend will be further exacerbated by COvid-19 and social distancing norms. 

Fintech startup lenders are poised to garner a trillion-dollar market size by 2025. In such a scenario, it becomes imperative for traditional lenders to analyze the options for growing their loan portfolios. But it is also essential that the underwriting remains robust and the lenders are not moving down the credit ladder without a well-planned strategy. 

Following are the strategies banks could choose to increase the loan portfolio:

  1. Analyze the current portfolio of the bank. In order to assure profitability along with portfolio expansion, the first thing banks need to do is analyze their current loan products and services. An in-depth analysis will allow you to map which loan product has the highest conversion rate and the largest profitability. The lender will be able to judge its offerings’ strengths and weaknesses and accordingly execute changes in the product mix. Rather than just looking to add new products, portfolio analysis allows for an insight on which market to approach and how to tailor the product for maximum profitability.
  2. Identify new loan programs. Competitive analysis is critical to evaluate if the lender is missing something. Portfolio analysis is an inward-looking exercise. The lender also needs to analyze the different products being offered by its peers. This market research will be necessary to create winning new products and expand into new asset classes. Post-COVID 19, banks able to identify business and consumer classes whose creditworthiness will not take a major hit due to the pandemic and tailoring offerings for such borrowers will be a key differentiator. Now is the time for community banks to focus on the Paycheck Protection Program  and originate the PPP loans. The treasury created an opportunity in which most banks and credit unions can be originating the SBA PPP loans. Unfortunately, some banks are still stuck waiting for an SBA account. Even if you are one of those banks, it is still worth looking at. There is a high chance of second wave PPP after the funds are exhausted. Banks that have started processing the PPP applications but have a high backlog, it might be worth looking at tools that can help to speed things up. One option is Paycheck Protection Program Software. Our team has been implementing banking clients who have been processing the PPP loans manually but want to do it faster and more efficiently. Please reach out to MonJa team if you are interested in demoing MonJa’s PPP Software
  3. Utilize referral sources. Adding affiliates is critical in today’s markets. These affiliates can vary from partnering with a local retail chain, CPA firms to social media influencers whose audience overlaps with your target customer base. These partnerships usually do not have any major upfront cost and the lender incurs an expense only when there is an actual loan disbursed. 
  4. Farm your existing customers. Your greatest (and cheapest) source of leads is your own customer list. The opportunity to cross-sell products is tremendous. Go through your account holders and assess who can be offered a pre-approved loan. For instance, a business customer is always a great source for personal loans as well. Farming your existing customer list will always lead to incremental revenue at very little additional cost. 
  5. Increase appearance. If you are a bank with deep local roots, leverage them to your strength. Associate with the local high school or college football team. Sponsor the local business clubs and make sure you associate with relevant local social media personalities. They might be micro-influencers with less than 10,000 followers but they can allow for extremely targeted advertising.
  6. Review denied applications. By analyzing the denied loan applications carefully, you might find a pattern or segment of loans that could have been made if underwriting standards were adjusted slightly without taking on additional risk. Most banks have conservative underwriting criteria; changes can be made that don’t increase the portfolio’s overall risk, but allow for additional loans to be originated. The rejected list might be a big one due to COVID-19 but using powerful data analytics should help glean insights into taking the right bets. 
  7. Increase business retention. Your business cannot survive if you are looking to replace your existing clientele all the time. It is an unending sprint on a treadmill if your organization is always looking to only sell, sell and sell. Also, if your customer churn rate is too high, then your focus needs to be on improving your product and your service. 
  8. Boost technology. Technology has disrupted finance. Marketplace lending startups are writing new rules for the consumer and small business lending space. A bank can look to learn and partner with such young companies. It needs to learn the power of automating credit underwriting and why it is essential to improve customer experience. No borrower is going to wait 10 days for a $10,000 personal loan. It is just not going to happen in today’s digital-first world. Having a digital offering will ensure you can attract the millennial segment and improve your net promoter scores.   

 

Conclusion

Every bank wants to increase its loan portfolio. But it is critical that the lender does not break its underwriting rules to grow big during such a health crisis. Adding a tech partner who can automate the borrower onboarding process, analyze various options and allow for faster credit underwriting is essential for winning market share in the current lending scenario where businesses are being brutally punished by COVID-19. In the end, the bank needs to assess the current situation and accordingly tailor a strategy for growing its loan portfolio. 

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