According to the Central Bank’s Domestic Money Bank’s Income Statement, a total of GHS2.086 billion was written off as bad debt by banks operating in Ghana. The total bad debt stock was 4.7% less than that of 2020 which was GHS2.183 billion.
Dear readers, last week, I shared some sentiments about how regular loan monitoring can be optimized as a risk management tool in the traditional lending process. I concentrated on how customer visits and face to face meetings with borrowing customers could reduce loan defaults to a minimum. Visiting customers’ premises is very key from day one of the loan process. Early warning signals could be seen and nipped in the bud. Various financial institutions have developed ways of monitoring commercial loans granted to customers. It is always advisable to have a standardized format for uniformity in reporting. These help loan officers identify both healthy loan account operations as well as early warning signals.
Pressure on Relationship Managers
Under tremendous pressure to grow loans and revenues more efficiently in a highly competitive market, much of the average Relationship Manager’s effort and technology spent is focused on getting the loan approved and on board. Borrower assessment and loan monitoring technology can sometimes be a lower priority. When a bank underwrites a new loan, it conducts a full credit assessment on the borrower, including the borrower’s ability to pay back or refinance the loan at the time of maturity. The bank expects the borrower’s credit profile to remain the same as, or better than, at the time it extends the loan. It puts in place covenants and other requirements to ensure that a minimum set of standards are met for a borrower’s future conduct and financial performance. Most covenants establish benchmark metrics that are intended to ensure that the borrower remains financially healthy, and the bank’s investment is protected. These restrictions are based on the borrower’s specific balance sheet, income statement, and cash flow characteristics, most commonly expressed in the form of financial ratios. Other covenants monitor reporting and disclosure, to set a minimum standard of communication with the bank.
Challenges in Loan Monitoring
As stated last week, several scenarios encountered by Relationship managers during loan monitoring makes loan monitoring quite daunting.
- While remote monitoring using the systems might seem the best, many SMEs still perform largely cash transactions without channelling all proceeds to the bank account. Some monies would also be on the mobile wallets while some are held with debtors without a structured bookkeeping. Checking inventory can also be only scratching the surface.
- Under covenant monitoring, many banks do not have the appropriate tools to generate timely alerts on when these items are due for receipt.
- For many commercial borrowers, the collection of information requested by banks is an onerous task that can sometimes be seen as intrusive to the actual running of the business.
- Reviewing borrower financials, determining the risk rating, and preparing the credit write-up is time consuming. It takes almost the same amount of time as performing a full credit assessment.
Standard Commercial Loan Monitoring Formats – The Traditional Method
Standard loan monitoring is a combination of both manual and technological processes. Due to the limitations encountered in relying solely on technology, loan officers use a generic question and answer format as a guide under the following structure:
Compliance:
- Was the facility used for the stated purpose?
- Has customer complied with the agreed post-disbursement conditions?
Account operations: Is the account operation on course?
- Is the loan repayment schedule on course?
- Are any standing orders or cash build-up on course?
- Is customer involved in dud cheque issues or frequently calling the bank not to honour some cheques issued?
Business Operations:
- Any relocation of the business?
- Business operations on course?
- Are there any idle resources?
- Are business records being documented?
- Are sales on track?
- Are stocks in the line of the approved business loan?
- Any sign of diversion of funds?
- Availability of business owner at business premise?
- Has customer’s internal control system deteriorated?
- Is customer repeatedly absent from the premises during visits?
- Is the business closed during normal working hours?
- Are turnovers in line with expectations in the loan appraisal?
- Are cashflows in line with the budgeted cashflow submitted?
- Are funds generated adequate to meet the loan repayments?
- Has customer complained about the insignificant nature of facility granted?
- Does customer frequently refer to the interest rate as too high?
- Has customer requested for additional funds during visits?
SECURITY/COLLATERAL
- Any change in the state of security provided?
- Any change in the neighbourhood that may affect the value? E.g change from residential to commercial neighbourhood?
- Is there any encumbrances on the security offered?
- Current value of security?
- Has the customer requested for a change of collateral?
- Are there enquiries from third parties or the owners of the collateral about the customer’s business operations?
SOCIO-POLITICAL
- Any change in borrower’s lifestyle?
- Is customer’s level of influence within the community significant?
- Is customer actively involved in local politics?
- Does it have any significance to the type of business being undertaken?
REGULATORY
- Is customer’s business likely to be affected by new regulatory decisions? Eg, Ban on some commercial activities, relocation of certain businesses or infrastructure, new levies and taxes.
- Is there a major determination of the general micro-economic trends on customer’s business?
There are more items depending on the borrower’s nature of business.
The Use of Technology in Loan Monitoring
Let us look at some benefits of using an integrated solution in addition to the manual loan monitoring
- A robust system that can track requirements under the loan agreement and internal policy requirements is critical.
- A good system can also alert the banker when items are due from borrowers, or certain tasks need completion internally, such as an annual review or a client due diligence visit.
- Covenanted information when posted onto a customized system can pool the data, and using it in various meaningful ways beyond merely compliance, for example tracking and comparing borrowers across a variety of financial metrics, including revenues, cash flows, and leverage levels.
- AI and machine learning can capture the borrower’s information onto the Banks database without manual data entry, for easier decision-making.
Redefining Loan Monitoring – Making the best of both worlds
Many traditional lenders still rely on manual methods of borrower information gathering and human analysis to underpin their credit portfolio monitoring. However non-traditional lenders already employ near real-time data to assess and monitor credit risk effectively. Some banks, for example, rely on the information it captures continuously from its commercial customers to make credit risk decisions in lending money to these customers. It captures data such as daily or monthly sales, payment terms, product returns, and even customer satisfaction ratings to inform those decisions. With these, the customer obtains working capital finance from the bank. In reality, many customers still rely on cash transactions, making bank transaction history monitoring very difficult.
The use of non-traditional data for credit risk assessment is gaining traction in banking. With the appropriate technology, the use of a loan monitoring system that applies machine learning techniques to borrowers’ financial data, alongside macro and micro economic information, behavioral metrics, and relevant industry key indicators to identify which borrowers might face financial distress is becoming very beneficial to Banks. These can only be successful when most customers are also onboarded with improved payment systems which would support the data gathering by AI to reduce the time spent on fieldwork. With video conferencing, loan monitoring and statistical data gathering would become an enjoyable experience and no more a chore.
For more insights on this topic, please book a copy of my new book, “THE MODERN BRANCH MANAGER’S COMPANION” which involves the adoption of a multi-disciplinary approach in the practice of today’s branch management. It also shares invaluable insights on the mindset needed to navigate and make a difference in the changing dynamics of the banking industry. Call 0244333051 for your doorstep delivery.
ABOUT THE AUTHOR
Alberta Quarcoopome is a Fellow of the Institute of Bankers, and CEO of ALKAN Business Consult Ltd. She is the Author of Three books: “The 21st Century Bank Teller: A Strategic Partner” and “My Front Desk Experience: A Young Banker’s Story” and “The Modern Branch Manager’s Companion”. She uses her experience and practical case studies, training young bankers in operational risk management, sales, customer service, banking operations and fraud.
CONTACT
Website www.alkanbiz.com
Email:alberta@alkanbiz.com or [email protected]
Tel: +233-0244333051/+233-0244611343
