Jeff Judy

Jeff's Thoughts - October 7, 2015

Behind the Times

In this edition of Jeff's Thoughts, my colleague Jim Lohn shares his long experience in credit review, where he has often seen the consequences of relying on poor quality or out of date information from borrowers. More about Jim below.

Having worked in the credit arena for several decades, I've become concerned about the quality and timing of information many credit institutions are getting from their borrowers. In particular, many in our industry fail to take advantage of the technology currently available, not just to us, but to our customers.

Take account receivable lending for instance. This covers a very broad type of lending from true asset based (and highly monitored) lending to lines used for seasonal expansion. But the most common kind in community banking is a line of credit to carry AR.

Although an annual pay-out may be required, it often doesn’t happen, because the business is really undercapitalized. So we “monitor” them by getting a monthly AR aging report and balancing that report to the general ledger.

This may come along with many different controls and formulas, but they aren’t usually the issue. The issue is whether our information is as up to date as it should be in today's business world.

The monthly aging is typically due to the bank by the 10th or 15th of the month. Then the bank lends against that report until the next report is received. Looking more closely at that routine, that means some of the ARs have already been paid when we receive the report, and most of them have been paid when the next report is due. Doesn't that make this report a lot of work that doesn’t really tell us much about our borrowers?

We can improve it, by having it due by the third business day. After all, in 2015, virtually all businesses are keeping their AR records on their computers. (If they aren’t, we probably should be asking some questions about their accounting practices!)

We also know that these businesses need to keep their AR records up to date. No business person would tell a customer who wants to pay their bill that they don’t know what the customer owes, but will call in couple weeks and settle up then.

Years ago that long period to receive and rely on information was based on hand written ledgers or postronic machines. Today the world moves much faster and the information is available more often, more quickly, and more accurately with a few clicks on a few buttons. Any borrower should be able to produce an accurate AR listing easily within 3 days, even if there is a regular weekend in that period.

The same thinking could be extended to many other kinds of information we would like to see from our borrowers (and that we would like to know the borrowers are tracking for themselves). Yet I see so many institutions that haven't caught on to opportunities for faster, better information. They continue with the same monitoring practices for no other reason than "that's how we have always done it".

Today's financial institutions, no matter what their size, are constantly expanding their use of technology. They are managing, processing, and reporting more information than ever before.

The point is, so are our customers. It is time to change our expectations around financial reporting from our borrowers to better manage each credit to full repayment.


About Jim Lohn

Jim is a seasoned and respected credit manager, who after 43 years on all sides of the lending desk now runs Loan Review Associates in Renton, WA. Jim served on credit boards of large banks, on the SBA advisory council, was an OCC lead credit Expert and holds Credit certification from RMA and BAI. He can be reached at james@loanreviewassociates.com .