Jeff Judy

Jeff's Thoughts - November 16, 2016

Questions, Questions ...

Many institutions collect quite a number of metrics on their credit staff, especially on the sales side of things. Customer interactions, calls, products booked, and many other indicators of activity are gathered on a regular basis.

Metrics on the credit analysis side of things are harder to come by. If I could invent one, it would be to measure the quantity and quality of the questions credit staff ask their potential borrowers.

Of course, we know certain questions get asked. But all too often, they are limited to simple facts. The financial statements are really the answer to a lot of questions like, "What's happening with sales at your company?" Routine clarifying questions that basically refine the numbers you get are just a starting point.

The really interesting, but often unasked, questions deal with the future, starting with "why" questions. Suppose you ask your borrower about their projected sales for the coming period, and they say, "We expect sales to grow." That's your cue to ask, "Why do you believe that?" If the borrower's answer is "because we've had eight straight quarters of sales growth," you might want to probe deeper. You probably have a borrower who is just assuming that past trends will continue. That borrower may not have thought about the factors that drive sales, and both they and you may be blindsided by a sudden shift in one of those factors.

So try some "What if?" questions on your borrower. "What if that big box store they're talking about is built near you? How will you respond?" Depending on the nature of your borrower's business, you may ask what happens if key materials become scarce, or if a service or supplier the business depends on runs into trouble.

Another way to probe your borrower's future is to explore larger topics in the economy and local marketplace. "As we near full employment, it has to be getting harder to hire the employees you need to keep up with this sales growth. Have you thought about your labor costs going forward?"

Now, the answers to these questions are helpful in credit analysis in two ways. The first, more obvious way is that they provide relevant information about the borrower's future.

But just as valuable is what these questions reveal about the borrower's management team. If these questions raise issues that the borrower has never considered, if they don't have decent answers to most of them, you've got a borrower whose success may be as much a product of favorable conditions and good luck as it is the result of management action. And in that case, you can decide whether you want to be more cautious about how you extend credit to them. Or you may decide to act as an advisor, help them wrestle with these questions, and grow your borrower into a better managed, more predictably successful operation. The latter also builds a strong relationship with the borrower, opening up other revenue opportunities.

Unfortunately, I don't have any simple "question metric" in mind, one that could be logged automatically and produce a score. But modeling question-asking is a powerful tool. If approvers ask these kind of questions when a credit is presented to them, and send staff back to the borrowers for answers, these questions will quickly become part of the credit analysis process.

Don't be satisfied with "what are the numbers" types of questions. Probe your borrower's understanding of their business and of the conditions under which they operate for better credit decisions and more profitable relationships.