Best Practices for Loan Portfolio Management
April 2018

For many financial institutions, lending is the primary source of revenue. Therefore, loan portfolio management is a key function that is directly tied to the success of a financial organization. Understanding the best practices of loan portfolio management can help your organization maximize profitability, minimize risk and to identify concerns before they become large problems.

Best practices for high quality loan portfolio management and analysis include:

  • Understand Key Metrics – The first step in loan portfolio management is to understand which metrics are most important. For example, do you know which loan types contribute most to your expected loss (what we call relative impact)? What about profitability? Do you know how interest rate risk is affecting your loan reserves? Are you scoring your loans for risk and profitability? This type of analysis requires using advanced statistical methods such as multi-variate regression, logistic regression, bayes theorem, and cluster analysis. So, you should plan on brushing up on your statistics before your attempt to do this on your own. An alternative to trying to trudge through the data by yourself is to utilize a loan portfolio management system, such as Visible Equity.
  • Reviewing risk throughout a loan’s life – Financial institutions attempt to reduce their risk by closely evaluating a borrower’s creditworthiness prior to approving a loan. While this process can help financial institutions to make good financing decisions, it only provides a snapshot of a borrower’s financial situation. This is why loans should be continually monitored and managed throughout the life cycle. By identifying groups of customers that have similar habits or history, financial institutions are better prepared to address slips in credit worthiness before an individual defaults.
  • Know the Financial Institution’s Objectives – Every financial institution has different objectives based on their size, historical focus, competition and customer base. World class financial organizations manage their assets by focusing on the specific needs of that organization.
  • Managing to Meet Exams – When analyzing and managing a portfolio, it is important to consider what examiners may be looking for during their audit process. Loan portfolios should be managed in such a way that pulling documentation for examiners is made simple. Additionally, your management of the loan portfolio can be used to demonstrate how the organization is mitigating risks.
  • Manage Interest Rate Changes – Interest rate changes can dramatically affect the behavior of borrowers and savers. Use changes in the interest rate as a trigger for reviewing your loan portfolio. This way, your financial institution can tailor its product offerings based on the needs of the client and employees.

The process to manage loan portfolios is made simpler with the right data analytics software. By having results at your fingertips, your loan portfolio management team can spend less time crunching numbers and more time making strategic decisions. Contact the team at Visible Equity for additional information on our loan management options.


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