The Ghanaian economy in recent times can be considered to be in uncharted waters. Lending and the general business of banking therefore need to be positioned properly within the current climate. A quality credit portfolio is what every Financial Institution (FI) desires, but to deliver a quality credit portfolio in this turbulent economy requires engagement among practitioners; to share ideas on how to navigate the current economic terrain.
This article seeks to provide an insight into things of note for FIs in their credit-delivery process.
Depending on the FI and the structure they operate, the credit/lending function can be broken down into a few key parts:
– Credit Marketing
– Credit Origination
– Credit Evaluation/Appraisal
– Credit Documentation
– Credit Operations
– Credit Monitoring & Collections
– Credit Reporting
These functions can be merged or redefined for purpose, based on the focus of each organisation. Some institutions are more risk-averse than others, and will structure the credit function to align with their risk appetite.
As a sequel to my recent posts, I will attempt to offer my opinion on how Credit Staff can operate within the current economic climate while adhering to the risk appetite of FIs they work with.
Credit Risk Approach
With the current economic situation in Ghana (high interest rates and inflation), ordinarily FIs will focus on reducing exposure to the private sector due to the harsh economic environment, as well as the uncertainties that lie ahead. In Ghana’s very peculiar situation, however, banks and other FIs may not feel too bullish about lending to government or the public sector. My suggestion would ordinarily have been for the Credit Risk function to be overly critical of transactions; ensure all ‘Ts’ are crossed and all ‘Is’ dotted.
I would also have suggested that Institutions should be exceptionally selective with their transactions. But the existing situation begs for a very different approach. Banks necessarily will have to lend to the private sector to be in business. If you are in the credit risk function in this situation, I recommend the following:
– The BAU approach of having a singular mind to critiquing proposals will need to be slightly amended.
– Considering the risky economic environment, one still needs to be critical of proposals.
– There’s however need for an additional approach in providing alternative solutions to proposals that may not align with the institution’s risk appetite, due to how they have been presented.
– Credit risks occupy a unique space that allows them to streamline credit proposals so key risks are mitigated and allow the bank to still undertake transactions with innovative structures.
– In short, the credit risk function should adopt a more creative approach to financing without relaxing the measures put in place to protect the bank.
– Credit Documentation as well as Monitoring must ensure that appropriate credit covenants are in place to ensure risk to the bank is mitigated.
Credit Marketing/Origination Approach
There will be obvious pressure in this space to generate value and provide viable options for the bank to invest deposits/capital. This is a very important function that should not be taken lightly. Relationship Managers are often known to only see the business side of transactions, and have very little focus on associated risks. I do not seek to address the accuracy or not of this assertion in this write-up, but to offer the following suggestions:
– As indicated above, the BAU approach of bringing in every type of lending transaction with obvious risks needs to change.
– The lending environment remains risky due to prevailing high interest rates and high inflation amid economic uncertainties, and this should be kept in mind.
– Officers in the Credit Marketing space need to put on their ‘risk hats’, and do well to engage the credit risk function with respect to transactions bearing obvious risks but with great business potentials.
– Risk Assessment and Mitigation should be key considerations in facility structuring and arrangement, even during initial engagements toward credit origination.
– It should also be understood that despite set targets/budgets, not all transactions can be financed by all banks within their risk appetites.
Conclusion
In conclusion, in order to brave the current economic storms and come out safe and strong, there is a need for strong collaborative efforts between the Credit Marketing and Credit Risk functions. Banks need to necessarily lend, but they have to find more innovative and sustainable ways to do so. This will go a long way to ensure Business continuity.
[email protected] / 0261641151
(The author is an Associate Member of the Chartered Institute of Bankers-Ghana, and a Certified Credit Administrator)
