4 crucial areas for growth in corporate lending

June 24, 2021

Areas for growth in corporate lending

For most of its existence, the byword that has come to define the banking industry is stability. Generally speaking, banks have preferred safe, low-risk investments with a certain return, rather than more volatile investments with larger returns but also a higher probability of failure. This ethos has turned banking into what it is today: the trillion-dollar industry that companies and even entire countries depend on for capital and economic vibrance.

Unfortunately, this ethos has also been responsible for keeping banks from adapting to the changes of the times. Recent events, such as the rise of mobile technology and the global COVID-19 pandemic, have changed both the industry and the playing field in which it operates in indelible ways. In order to respond to the myriad challenges posed by modern society, banks must rethink their approach to their own systems. They must also embrace modern commercial banking applications that are more suitable for today’s consumers. 

How to make a digital leap into corporate lending

If you are a part of a bank’s leadership and are considering making the digital leap, here are four segments of corporate lending operations that could benefit the most from a boost to your tech stack.

Global credit assessment

By and large, credit information and eligibility for loans have varied greatly and are often kept in silos designed by the credit validator. This used to be true within individual countries as well as across international borders. Because of disparate bank and credit histories divided across the different geographic spaces, people interested in corporate lending may be ineligible for a loan in one country but have a near-perfect credit rating in another.

This inconsistency is being reconciled thanks to digital transformation. Banks throughout the world have begun to come together to establish enterprise credit rating systems that can parse disparate data from various sources. These systems allow banks to arrive at a more accurate credit rating for individuals and corporations alike, reducing the risk that they must assume when making loans available. This simultaneously encourages more reasonable borrowing and improves the bank’s bottom line.

Loan origination

Loan origination is the process by which a lender receives and processes a loan application from a borrower. While most banks have already invested in some kind of loan origination system and built it into their IT infrastructure, these may become inadequate very soon. Now that the worst of the COVID-19 pandemic seems to have passed, many finance experts expect a sharp rise in the need for corporate lending. That said, older loan origination systems may not be able to provide a fully digital experience and are likely ill-equipped to handle such a deluge of applications.

In addition, these systems were designed without client-facing self-service features, as they were mostly meant to be used by bank personnel. Now that customers are more aware of the value of no-touch banking and self-service options, banks must upgrade their IT infrastructure with a system that addresses current customer needs and expectations.

Credit risk mitigation

When releasing a loan, banks have an inherent risk that they may not see that loan paid back. While this risk is generally very small relative to the bank’s expected return, there still exists a possibility that the borrower defaults and ends up becoming a bad investment. In the past, banks relied on a tried-and-true set of measures to determine clients’ potential creditworthiness, including their transaction histories and credit ratings from third-party assessors.

The economic crisis that has arisen as a result of the global pandemic has thrown many banks’ risk monitoring operations for a loop. Previous risk assessment models simply fail to account for current conditions, having been designed in an era where these conditions did not exist. Consequently, risk ratings for products have been invalidated as banks search for a new way to assess and mitigate risk. Bank decision-makers have to make a decision and take risks sometimes. Now, they need a new monitoring system that accounts for new risk models and circumstances established by current conditions.

Loan servicing

As previously mentioned, banks have been dependent on manual operations for far too long, and that dependence is most evident in loan servicing. This crucial operation brings together so many of a bank’s lines of business, including customer service, risk management, accounting, and reporting. All these departments are forced to work together with processes that are, by and large, manual and paper-bound.

As a result, this is the loan operation that is notorious for being one of the most error-prone and, therefore, costly. In addition, operations-side bank errors erode client confidence, something banks can ill afford in today’s uncertain times. Rebuilding a bank’s tech stack with a single data foundation results in seamless inter-department communications and fewer manual errors. This could potentially eliminate revenue leakage and save banks millions of dollars.

Conclusion

Bank loans are crucial for financing businesses, but that doesn’t mean they don’t need to improve their services. To be able to respond adequately to today’s macroeconomic conditions, banks must embrace more agile principles and explore ways of doing business that may seem divergent from what they are accustomed to. Starting with these areas for growth in corporate lending is the proven way they can remain relevant and influential in the midst of such a  global upheaval.

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