Jeff Judy

Jeff's Thoughts - October 18, 2017

Thinking About Thinking


The credit business is all about information, and that means a lot of thought goes into every transaction. That’s not the same as saying that a lot of original thought goes into each credit. In fact, the credit industry has mastered the art of codifying, of freezing, the thinking of the leadership about optimal credit practices and then finding efficient ways to apply that thinking again and again.

Think about the process one of your credits goes through from initial request to final decision and you will find several places where information, where past decisions about how things should be done, is stored. Some of those places include the heads of credit approvers, credit administrators, and other players in the credit process.

But there are couple of areas where this storage of information to be retrieved and applied is particularly “hard-wired”, we might say.

One is in software. We’re an industry that makes heavy use of technology to do some of our thinking for us. Software guides and constrains the information we gather as part of the borrower’s credit request. Of course, software typically plays a major role in the analysis phase of the process. Throughout the process, software ensures that various steps are completed in the same way for one credit after another.

Another place where information is stored to be retrieved and applied is in the credit policy and procedures manuals. In these hefty documents, innumerable details about what data to collect and about how to interpret borrower data are laid out to guide both the front lines and the support team through preferred credit practices.

Now, there are many benefits to having all this information stored and applied repeatedly to potential credits. It helps ensure consistency. It brings the lessons learned from years of credit practice to help shape current procedures. It speeds up the process as well, effectively providing a form of built-in supervision or oversight as the credit staff perform their work.

The problem with this stored information is that that conditions change over time, and all too often, that "frozen" information remains the same. Updates to the "stored thinking" are often purely reactive. We only go in there and change things when we absolutely have to.

Perhaps some aspect of the software is recognized as a problem by the staff who use it, and people come up with "work arounds" to handle the problem. When everybody is using one or more of these work arounds in their daily work, it is time to take another look at your software.

Similarly, as policy and procedures fall behind changes in your credit environment and marketplace, certain exceptions are accepted routinely. Finally, at some point things get bad enough to patch that particular section of the manual. But over time, policy and procedures become a haphazard collection of internally inconsistent patches, actually working against the consistency and standardization that the manual is supposed to ensure.

Wise institutions explicitly schedule routine reviews of their thinking, as captured in software, systems, and the credit manual. For instance, they could tell you exactly when the next comprehensive review of credit policy will take place. They have a rigorous process and designated team for looking at the information that is stored and reapplied in the credit process, and they make sure that captured information and current needs and conditions do not drift too far apart.

They check in with front line staff to see what work arounds are being used repeatedly in the credit process. They look at policy exceptions not as just numbers to be held below a certain level, but as data that can help refine policy and procedures.

If you let things go too long between reviews of your thinking, your staff get used to work arounds and exceptions. They come to believe that the stored record of "official thinking" is somewhat irrelevant to how they do their jobs, and that eventually leads to problems.

Take the time, on a regular basis, to think about your thinking. And don't complain that you or your team cannot find the time for comprehensive reviews of this information. If you cannot find the time to keep your thinking relevant to actual credit practices, don't complain when those bad credits start to pile up.