Commercial Lending Resurgence

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Ashish Deshmukh - Photokaushal_Verma (Newgen)Commercial Lending in the United States has been a roller-coaster ride over the past few years. It remained the most profitable business arm for banks till 2008, when the financial crisis came along as a huge reality check. The global meltdown brought with itself sweeping changes that transformed the operational and strategic framework of this critical financial instrument forever.

The focus on the customer and the top-line growth clearly got sidelined, while a wave of skepticism seeped in, pervading all through. This skepticism was characterized by the prioritization of risk management and compliance measures over customer experience and operational responsiveness. The processes became rigid and strenuous as the internal business policies got aligned with the tight external market conditions. An air of sheer conservatism gripped the commercial lending market, from Corporate and Industrial Lending to Commercial Real Estate, Equipment Financing, and Consumer and Small Business Lending.

Recently, however there are clear signs of revival as the international markets have consolidated and diversified. In a sign of increased confidence, large, small and foreign-related banks in the United States increased commercial and industrial loans at double-digit rates in the last year. Loans to commercial and industrial firms rose 8.5% in the first quarter of 2015 and is all set to outpace residential mortgages soon according to the data released by Federal Deposit Insurance Corp. Commercial Lending has also gained ground within the “smaller” domestically chartered banks.

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However, there is an all new set of challenges that awaits them as they gear up for this battle to remain competitive and compliant.

>> Regulatory oversight has intensified significantly, and managing new and evolving requirements is a challenge – particularly from the perspective of accurate reporting requirements of Dodd Frank and CECL

>> Risk management is becoming a holistic process across lending institutions, requiring more standardized processes and better understanding of exceptions

>> Aggressive competition from other banks and emerging non-banking lenders is a threat

>> New and upcoming sectors are providing opportunities with immense potential that cannot be neglected

Business Transformation – The Need of the Hour

The recent turn of events augur well for banks and financial institutions globally. They also create a compelling need to steer away from the shadows of 2008, and rope in incremental changes that deliver a competitive advantage to banks early on in the rapidly stabilizing economic environment. Slowly by surely, most forward looking banks have shed the self-imposed ‘cocoon’ that implied limited target markets and lack of process innovations. They are now moving towards modernizing the commercial loan origination function by relying on proven technologies and trusted domain experts to transform their businesses. By doing so, they aim at achieving a balance between the need to reduce operating costs and risk with the need to win more customers and expand profitable relationships.

Drivers Expectations
Revenues •       Sell more loans with increased sales capacity

•       Unified view of the customer relationship

•       Improved turnaround times

•       Better customer experience

Efficiency •       Optimize FTEs needed

•       Operational efficiency and resource productivity

•       Automated Credit Risk Assessment

•       Guaranteed timelines on credit approvals

Expenses •       Reduce IT Hardware and maintenance costs

•       Reduce Third-party integration costs

Risk •       Reduction in regulatory and compliance fines

•       Improved employee retention rates

•       Real-time pipeline

•       Consistent portfolio management

•       Automatic covenant monitoring and collateral management

Maintenance •       Implement changes to the system and become self-reliant to provide new capabilities.

Multiple stakeholders involved in the commercial lending lifecycle have distinct set of expectations from such transformation.

The Three Choices

Banks may adopt one of the three technology choices to meet the above imperatives.

The Traditional Approach – Building an Enterprise Application

Large Banks can leverage hard coded enterprise applications or systems to manage the policies, processes and structures within the commercial lending process. They have to develop an in-house application by setting up a team and corresponding infrastructure. These monolithic applications are hardcoded and do not support process level changes associated with the evolving market dynamics and regulatory compliances. Moreover, These solutions provide automation only in certain aspects of the process and not end-to-end automation. Any change introduced at a later stage can be a costly and time consuming affair, prolonging the time to market and compromising the business and operational agility.

The Point Solution Approach

A point solution would possibly address the current needs of the bank with regards to the automation of the commercial lending process. However, it will not allow the bank to introduce incremental improvements by limiting the flexibility of process changes due to its rigid solution architecture. Also, with disparate systems to work with, employees will not be able to function at the productivity levels that they are capable of.

The Transformative Approach – BPM Based Solutions

The pervading technology which bears the capability of an end-to-end transformation of commercial lending processes is a framework based approach called Business Process Management (BPM). It has the inherent benefits of both “build” & “buying of the shelf” along with the adaptability to business stakeholders to drive the solution based on their business strategy & regulatory compliance level changes.

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The BPM platforms consist of configurable components like the rules engine (BRMS) to store the credit policies, Document Management System (DMS) and workflow which enable businesses to run processes they want rather than what the application demands. Customizable user interface, seamless integration with third party software & mobility framework further enhance the productivity levels

Whether it is the question of increasing profitability, ensuring business agility, reducing business risks or enhancing customer experience and satisfaction, BPM can deliver by focusing on continuous process improvement and operational flexibility. It helps banks meet both its short and long-term objectives.

Why BPM

BPM facilitates collaboration between business and IT providing the bank with levers to implement a future ready solution, which enables:

>> Automating the lending approval process and implementing an optimized workflow, that enables improved TAT, predictability, transparency and better decision-making

>> Segregating tasks to enable the RM to focus on sales and passing non-value add data entry activities to back office / operations teams

>> Building a wrapper layer over all existing loan systems to give stakeholders access to all relevant information centrally

>> Digitizing the proposal to online forms. This facilitates capturing information in an actionable format and reproducing it in a Word / PDF document in the bank’s defined format for user reference

A BPM based integrated platform supports the entire credit lifecycle as well as exploit new delivery channels. This improves the efficiency and performance of all lending business units, which ultimately increases customer satisfaction across the entire credit lifecycle.

5 Things to Consider while Implementing a BPM Platform

What banks should be looking for during BPM selection and implementation, is recommended to be based on the following criteria:

1.) Power in the Hands of Business – The ability to change and modify processes according to the market needs and business strategy is a vital cog in the wheel. Banks must look for platform based solutions that offer this agility within their core framework, without the need for massive IT driven customizations.

2.) Business Impact Analysis – Banks must roll out the enterprise wide process transformation in a smooth manner, leveraging the existing infrastructure as much as possible. The training and complexity involved in the rollout must never go overboard or overwhelming for the business.

3.) Quick Time to Market New Products – Implementing a BPM platform is not just an IT infrastructural change. It must transcend both business and technology to align the organizational processes with the market dynamics. Simply put, it must support quick transitions in product and service offerings

4.) Enterprise Level Collaboration: BPM framework must have the capabilities which facilitate distinct business units (LOB’s) and systems to talk/interface to multiple underlying applications seamlessly. This interoperability is critical for creating efficiencies across key decision making scenarios. Integration with third party credit agencies & core solutions (jack henry ,Flexcube, Moody’s etc.) must be a salient feature of the project

5.) Unified View of Group Level Risk Exposure – The BPM platform must provide a holistic set of analytical tools at every stage of the process to assess the risk associated. Real-time process monitoring along with model driven risk assessment systems can enable this key business need.

The current positive sentiment of the market complimented by rampant industrial growth across most sectors clearly indicate the need to take bold steps. Banks and financial institutions must not shy away from the imminent need to adopt advanced IT systems that support business innovation. With BPM driven agility and process visibility, the fear of the unknown perishes, allowing organizations to undertake this transformation head on.

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