A financial institution’s first defense against excessive credit risk is the initial credit-granting process which is based on sound underwriting, an efficient, balanced approval process and a competent lending staff. These three pillars are the keys to effective credit analysis and can also be referred to as the 3 P’s: Policies, Process and People.
Policies (or procedures) refer to the overall strategy or framework that guides specific actions. Loan policies provide the framework for an institution’s lending activities. They set the standards for portfolio composition, individual credit decisions, fair lending and compliance management.
Process refers to the system or specific steps for doing something. The loan policy shapes the lending process. The process assigns actions and accountability, and establishes the responsibilities of the people involved.
People refer to the individuals executing the process. Lending staff, with their experience and various tools, arrive at quality loan decisions. Prudent lending standards govern underwriting, but people execute on those standards, and performance can be variable.
In a recent webinar hosted by Sageworks, 5 C’s of Credit: Enhance Your Credit Quality, attendees were asked which of the three P’s needs the most improvement in their financial institution.
Sixty-one percent said that their process needed the most attention, while 22 percent and 16 percent indicated people and policies, respectively.
Sageworks recently conducted a bank and credit union exam survey, where credit quality was cited as one of the biggest criticisms received from examiners. To improve asset quality, bankers must consider not only the 5 C’s of credit quality, but also how policies, processes and people promote them.
For more information on the 3 P’s of credit analysis, and 5 C’s of credit, download the whitepaper titled: Enhance Credit Quality.
