While the majority of the financial technology focus in recent years has been on loan origination systems and automated decision tools, portfolio management is the real key to long-term success in commercial lending. Just ask lenders how many bad loans they’ve made during their career. The large majority will tell you that each time a loan was made, the financial institution had every reason to believe it was a good deal. The loans were within policy and conditions at the time called for approval and funding. When loans stop performing, it is almost always because circumstances have changed. From macroeconomic factors to poor business management to other direct influencers, loans can deteriorate for any number of reasons. That’s why the next significant area of fintech development will be in portfolio management, rather than the pre-funding processes.
When choosing an effective portfolio management system, keep in mind the mission-critical elements that need to be in place. If you have an effective data integration strategy, your organization can make a seamless transition from application to underwriting, documentation, loan closing, and portfolio management.
The key elements that every portfolio management system should include are:
- Financial statement tracking (including secure electronic delivery of new information)
- Collateral evaluations (including borrowing base calculations when appropriate)
- Covenant tracking
- Exception tracking
- Renewal facilitation
- Notices and alerts for lenders and C-level managers
- Profitability evaluations at business level
- Predictive tools to determine additional lending needs (and future needs) of your business clients
- General portfolio-level measurement capabilities:
- Stress testing
- Concentration management and NAICS evaluations
- Portfolio- and loan-level risk scoring
- Portfolio-level profitability analysis
- Real time integration with ALLL and CECL calculations
Integrating these components into your portfolio management processes helps ensure consistency across lending units and individual lenders within your institution. It also makes the most of all the data that was accumulated during the loan origination process. In essence, you are creating a closed loop that covers the entire spectrum of business lending activities, from the initial application, through underwriting, and beyond final loan payout to the next financial need of each business.
While a significant amount of money has been devoted to commercial lending technology since 2010, most of these investment dollars have gone to improving online application and origination systems. The next several years will see more investment in the area of integrated portfolio management and monitoring.