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SMB Loan Portfolios
Question: What steps can banks take to protect against losses in its small business loan portfolio?
Answer: During the last quarter of 2007 commercial banks and thrifts reported dramatic increases in loan loss provisions due to escalating non-performing mortgage and construction loans. During the quarter bank earnings fell over 80%. This is prompting bank examiners to focus on banks' asset quality and other stressed loan areas like commercial real estate, credit cards and small business loans. Banks need to take urgent action to mitigate their credit risk in these areas. A bank's small business loan portfolio is an area where focused concerted action can make a major difference in reducing potential write-downs.
Engaging small businesses' owners and managers in a candid discussion about the need to assess business risk factors is an important starting point. A business risk review that looks at the borrower's products, clients, suppliers and other market-driven risk factors provides early warning signals about a business's financial health. Bankers that use risk assessment as an early warning tool will be armed with needed insights into a borrower's emerging financial health condition. This added transparency concerning the borrower’s economic viability and future creditworthiness enables the banker to make informed decisions and initiate remedies with the borrower to sustain a profitable relationship.
Banks need to take an activist approach to protect their capital base and shareholders’ equity. A formalized approach to small business risk management will be an important step toward restoring the confidence of regulators and investors in the banking industry.
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First published on BankersOnline.com 4/21/08
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