All money lending involves risk. Business lenders can begin to control risk and compliance up front by developing strong, compliant underwriting policies and procedures. Lenders can also manage risk by using loan portfolio management aided by collections software.
Information provided by the OCC states that effective management of the loan portfolio and the credit function is fundamental to a bank’s safety and soundness. Loan portfolio management controls the risks inherent in the credit process.
Debt payments tracking and loan portfolio management are essential processes for controlling credit risk. To manage risk, financial institutions must understand the types and levels of credit risk in their portfolio. One critical element of a sturdy portfolio management system is the loan review, which provides an evaluation of the general value of a loan portfolio.
Debts in the collection portfolio of a collection and recovery vendor typically include the entire client portfolio of every person, loan, and deposit; enabling portfolio performance, trending, analytics to happen.
Loan Review vs. Portfolio Review
A loan review is not a portfolio review. A loan review does not evaluate economic geography, borrower, or other factors that can increase portfolio risk. The loan review assesses loan quality at a definite point in time.
Specifically, a loan review: evaluates individual loans, including repayment risk, verifies compliance with lending procedures and policies, recognizes missing documentation, supplies credit risk management priority results, and recommends practices and procedures to deal with findings.
In most cases, it is impractical for the loan review team to review an entire portfolio; therefore, the loan review team will review a subset of files to assess the portfolio quality. Effective technology, such as collections software, including access to warehouses and work paper retention/storage; electronic storage loan line sheets with embedded policies in a Web-based format are also emerging.
A robust collections system help review any debt owed the bank or credit union. If the client owes the financial institution, for any reason, CARM-Pro can accommodate that past due debt collection and analysis.
Loan Review Reveals Risks
A thorough and correctly completed loan review provides management and the board of directors with objective and timely data on loan portfolio quality and recommendations for addressing weaknesses. A portfolio manager can now obtain early indications of increasing risk by taking a more comprehensive view of the loan portfolio.
Effective loan portfolio management begins with oversight of the risk in individual loans, according to the OCC. Careful risk variety is vital to maintaining favorable loan quality. Therefore, the historical emphasis on controlling the quality of individual loan approvals and managing the performance of loans continues to be essential. But better technology, such as with a complete collections software system and information systems opens the door to better management methods.
To manage their portfolios, bankers must understand not only the risk posed by each credit but also how the risks of individual loans and portfolios are interrelated, which can multiply the risk.
Many banks view the loan portfolio in its segments, and as a whole, and consider the relationships among portfolio segments as well as among loans. These practices provide management with a more complete picture of the bank’s credit risk profile and with more tools to analyze and control the risk.