Executive Vice President
Madison Capital, LLC
Good loan portfolio managers have focused most of their time on diligently approving loans and monitoring loan performance. Although these activities continue to be relevant today, analysis of past credit problems, such as commercial real estate lending in the 1980s, has made it clear that portfolio managers can never take their eye off the ball.
Lending practices that rely too much on trailing indicators of credit quality such as delinquency, nonaccrual, and risk rating trends can be faulty. Commercial lenders have found that these indicators do not always allow enough lead time to take action when there is an increase in risk.
An effective loan portfolio management strategy starts with oversight of the risk in individual loans. Careful risk selection is important to maintaining favorable loan quality. The historical importance on controlling the quality of individual loan approvals and managing the performance of loans continues to be vital. But better technology and information systems such as LeasePlus from Lease Team, Inc., have opened the door to better management methods. A portfolio manager can now obtain early indications of increasing risk by taking a more comprehensive view of portfolio management
To manage their portfolios, commercial lenders must understand not only the risk presented by each credit but also how they are interrelated. These interrelationships can multiply risk many times beyond what it would be if the risks were not related. Until recently, few commercial lenders used modern portfolio management concepts to manage credit risk. Today, many commercial lenders view the loan portfolio in target segments and as a group and consider the relationships among portfolio segments as well as among loans. These practices provide management with a more complete picture of the commercial lenders credit risk profile. Please see our video.