Bankers’ Hours column: Good loans don’t always get the money
OK, class, we’ve got an interesting topic today: interest rate risk in a volatile Federal Reserve monetary oversight environment.
So … what?
You’re tired of all this technical bank stuff? Who cares what the suits in the corner offices do, as long as they don’t do it to us?
I’m tired of it, too. Let’s talk about what banks are actually doing today, in the post-apocalyptic economic landscape of the financial world after the Great Recession.
Well, one thing they’re doing is doing very well. Almost everybody, even the smallest, least successful, survivors of the 2008 crash have healthy profit margins.
And they fully intend to keep this trend on the upswing, and do nothing to impede it. Which brings us to banking’s core business, one that affects most, if not all, of us: lending.
Banking has done an excellent job of marketing the concept that the industry is a jump-starter of small business, that credit from the institution is the key element in turning mom and pop into chairman and president, moving corporate deliberations from the kitchen table to the board room.
But this isn’t exactly the case. Business banking customers probably fall into three categories: first are those borrowers who don’t need the money, but find it convenient to borrow it. Then come those who do need the cash, but who have options. Finally, at the bottom of the heap are borrowers who need money for their businesses, and have few, if any options.
To any bank, the first two groups comprise prized relationships. In fact, they’re almost more like partners than simply customers. Of course, they’re treated accordingly. But in the third borrower category, the cost/benefit ratio can be distinctly unfavorable for the lender. Often these customers don’t sport a perfect loan profile. One or more weaknesses can show up in a variety of areas of a loan package. Often these elements are substantive: they do, in fact, affect the quality of the collateral, or the borrowers’ ability to repay the loan.
Sometimes, they’re not, but it doesn’t matter. The readers of this column (both of you know who you are, and you’re appreciated) may remember a point that’s been made more than once: The loss a lender books on a problem asset is just the tip of the negative iceberg. The major hit to revenue comes from lost opportunity, a result of spending time working on the bad loans, rather than making good ones.
Nothing in banking takes more time away from profit generation than interacting with bank examiners. Any red flag, no matter how small, in a loan file can trigger a question from a regulator, and these discussions can often metastasize into hours.
It doesn’t matter that the loan is obviously one of quality, with strong cash flow, strong borrower liquidity and good collateral. The one flaw, even if minor, takes it down several pegs in the bank’s internal rating system. A good loan has become a bad one. From a lender’s perspective, it’s just good protocol to stay away from a deal like this.
So if your banker shakes his or her head and dabs at the corner of an eye with a tissue while informing you that, unfortunately, your request has been turned down, don’t fret.
Your loan’s a good one; you just don’t get the money.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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