To say that bankers have had a lot on their plates since the onset of the pandemic would be an understatement. You had the Paycheck Protection Program (PPP), which ended up giving a shade under $800 billion in loans to more than 11 million borrowers. You had the pandemic itself, which forced financial institutions to manage remote teams and offer services – many of which were previously handled in-person – digitally.

All to say: it’s understandable that some banks poured most of their resources into the loan origination part of the loan lifecycle… and neglected the loan portfolio monitoring piece of the puzzle. Even though it’s understandable, the banks that are neglecting loan portfolio monitoring are putting their financial institutions at risk – potentially risking profitability and the loss of market share to a fintech.

Fortunately, bankers don’t need to hire a lot of staff to rectify this issue; they simply need to put a top-notch lending software system into place.

But what if you already have a system? How would you know if you need a different software solution?

Here are three ways to tell if your bank needs loan portfolio monitoring software.

1. You Need to Manually Enter Data into Your Software Systems

One of the most common obstacles between banks and the automation of repetitive workflows is a lack of integration between their software solutions. This lack of integration forces banks to deploy staff to manually enter data into their different software systems, which causes a couple of problems:

  1. You have to hire additional staff, or move your existing staff away from higher-value activities.
  2. It slows down the flow of data across the organization, forcing executives to wait to make decisions or act with incomplete information

With the right lending platform, however, your borrower data can be transferred between software systems – with little to no manual intervention required.

Let’s say you want to move your borrowers’ financial information to your lending solution. Instead of having an employee do it line-by-line, you can – depending on your software’s capabilities and your preferences – either a) transfer the data directly from your borrowers’ accounting software or b) scan the information from the borrowers’ financial statements.

With integrated software, you enjoy a number of benefits:

  • Increased productivity: you not only save the time spent manually inputting the data, but also ensure your departments don’t have to wait around for data they need to do their jobs.
  • Better decision making: with all of the data in one central location, bankers can quickly make decisions with all of the information at their fingertips.
  • Easier to scale up: manual processes are the enemy of growth. Integrated software, on the other hand, allows you to scale up your operations without much of an increase in your expenses.

You can think of integrated software systems as the foundation of your loan portfolio management. It’s not the only thing you need, but without it, your financial institution is going to struggle to get the full benefits of loan management software. For that reason, you should ask prospective vendors whether their lending software integrates with your existing software solutions – or consider getting new software that integrates with your new lending platform.

2. You Don’t Realize That Borrowers are on the Path to Default… Until It’s Too Late

If your current system doesn’t automatically identify SME clients who are in danger of defaulting on their loans, you may need loan servicing software.

You want to not only identify breaches of loan covenant agreements, but also anything else that impacts a small business owner’s ability to pay back their loan – even if they haven’t yet violated any terms.

Let’s start by looking at loan covenants.

Without lending software, bankers may opt to enter financial covenant agreements into spreadsheets. The problem with that practice is, in too many cases, the banker doesn’t get a timely alert that allows them to quickly take action when there is a breach of the covenant agreement. By not taking immediate action, a situation can go from bad to worse. And this assumes that borrowers are always submitting their financial statements on time… and that information is being entered into the system on time. It doesn’t always work like that – it’s much better to have a system that automatically updates pertinent information.

Even if the information is always up-to-date and the breaches are getting flagged, this type of system makes it tough to look at key metrics. For example, you may want to find out which types of borrowers are breaching their loan covenants more than others. Or maybe you want to look at historical trends. In any case, it’s going to be time-consuming – if you’re lucky – to get access to these metrics.

But ideally, through real-time monitoring, you can identify borrowers who may be unable to pay back their commercial loans – before they breach a loan covenant.

There are several ways that lenders can identify struggling borrowers, so that they can proactively make loan modifications instead of allowing the loans to go on the path to default.

One possibility is to create triggers that are based on financial data at a point in time. You might decide to flag borrowers if their profit margins dip below a certain level. In this example, you can even alter the level based on the borrowers’ industry – since profit margins vary across industries.

Another possibility is to identify period-over-period changes in financial metrics. For example, you could get an alert if a borrower’s cash flows decline for, say, two consecutive quarters. You could tweak the specifics based on whatever correlates with increased credit risk for your financial institution – maybe you measure a different financial metric or look at month-over-month or year-over-year changes.

Whatever you choose to do, the key is to target your loan monitoring. Your staff likely doesn’t have time to evaluate every loan in your portfolio on a regular basis. But by flagging the loans that need to be reviewed – when they need to be reviewed – you can maximize your resources.

3. You Aren’t Aware of What’s Happening Across Your Loan Portfolio

In the last section, we looked at why you need to identify individual borrowers who are on the path to default. It’s important to take it a step further, though, and identify the broader trends across your loan portfolio.

You want to know which parts of your commercial lending portfolio are performing well, and which parts are performing… not so well. To get the financial data to make informed decisions, you need to be able to filter your loan portfolio by geography, industry, business size, and financial metrics.

For example, your data may indicate that your commercial real estate loans in the Midwest are rarely going bad, but your mortgage loans on the West Coast defaulting at a higher rate. Armed with that information, you can dig deeper and find out what’s going on. Maybe your Midwest clients are concentrated in thriving industries, but a lot of your West Coast clients are in hard-hit industries.

You can also use triggers – which we explored in the last section – to identify issues across your loan portfolio. Let’s say you want to look at a group of 1,000 clients who sell SaaS subscriptions. You filter them by their year-over-year cash flows and find that 147 of them have experienced declining year-over-year cash flows. First of all, you now know that 147 of your borrowers may have higher credit risk than the other 853. From there, you can consider next steps, possibly making loan modifications.

In addition to the internal benefits that come from being aware of what’s happening across your loan portfolio, you also alleviate the regulatory pressure that exists in the financial services industry. It’s no longer an option to have solid risk management systems in place – it’s a requirement. These days, regulators want to ensure that banks don’t pose a risk to the financial system. In order to meet that objective, they need accurate and timely data. To prevent your bank from being overwhelmed by these reporting requirements, you need to automate the calculation and reporting of key financial metrics.

You Need the Right Loan Management System

Amid strong demand for commercial loans, it’s important to streamline the lending process with loan portfolio monitoring software. By implementing lending software, you can make life easier for your staff, improve your decision-making, identify struggling borrowers before it’s too late, and get a high-level overview of your loan portfolio.

Request a free Biz2X demo today and learn how our experience can benefit you and your borrowers right now and as your business evolves and grows.