The business loan portfolio is an important vertical for lenders. The value and volume of individual loans are sizable compared to other segments, such as MSMEs and retail loans.
In 2024, public sector banks indicated growth in their corporate loan portfolio in sectors such as energy and infrastructure. SBI’s year-on-year loan book, for instance, grew by 18.35%, while Canara Bank’s grew by 10%.
Such expedited growth, however, also comes with risks. Without conducting due diligence, for instance, lenders may witness a growth in Non-Performing Assets (NPAs).
In 2022, for instance, the outstanding loans of commercial banks stood at 45.06 %. Lenders looking to build a revenue-generating corporate loan portfolio must adopt a systematic, data-driven lending framework.
Let us outline eight best practices that can help lenders expedite growth without taking on unnecessary risks.
Key Challenges with Corporate Loan Portfolio Management
Here is a snapshot of challenges that stand in the way of superior credit management for corporate loans:
Inaccurate Credit Assessment
Lenders struggle with accurately assessing credit risk. Traditional metrics such as credit scores, assets, and valuation do not paint a holistic picture of a business’s finances.
Compliance Challenges
Regulatory guidelines keep changing, sometimes, overnight. Lenders, in turn, find it challenging to keep pace, execute changes quickly, and comply with all the rules.
This deficit can come at a costly price for lenders. Defaults can result in penalties, suspension, and shutdown of services.
Rise in Loan Fraud
Lenders are at risk of becoming embroiled in illicit activities such as money laundering, criminal activities, and fraud.
Since the ticket size of corporate loans is relatively large, lenders must have the capability to verify the source and destination of incoming and outgoing funds.
Standardised Solutions
Loan requirements across sectors and verticals vary drastically. However, lenders are unable to customise loans at scale due to a lack of resources and technology to do so.
This can lower competitiveness, which, in turn, comes with an opportunity cost.
8 Strategies to Boost Corporate Loan Management
Strategic credit management can help lenders derive more value from their corporate loan portfolios. Here are eight core strategies that can move the needle:
1. Reduce Risk with Portfolio Diversification
Businesses in the same sector tend to experience market downtowns and upturns simultaneously. The dot-com bubble burst of 2000 and the subprime mortgage crisis of 2008 are examples of entire sectors going bankrupt.
Diversifying the corporate loan portfolio with businesses from a mix of sectors is a hedge against taking on the risk associated with just one or two sectors.
By leveraging tools such as predictive data analytics, lenders can use historical data to forecast how sectors will perform in various market conditions in the future.
2. Analysing Cash Flow
Lenders traditionally give a high weightage to a borrower’s credit history, assets, and valuation. This approach can result in credit assessment based on perception rather than the latest financial data.
A more comprehensive method is to run an in-depth financial analysis of a business’s bank statements over the last six months or a year. Such analysis enables businesses to understand the cash flow of a potential borrower.
Positive cash flows indicate positive financial health. Lenders can make a data-driven underwriting decision based on this metric.
3. Automating the Financial Analysis Process
The sheer volume and scale of corporate businesses make it challenging for lenders to analyse financial data manually.
By adopting the use of a cloud-based loan management software solution, lenders can completely automate the process, which comes with the following benefits:
- Extracts data from bank statements swiftly and accurately.
- Segregates all transactions into inflow or outflow categories.
- Further segregates transactions into relevant sub-categories such as revenues, tax refunds, interest, capital gains (inflow), salaries, vendor payments, and taxes (outflow).
- After comprehensive analysis, the software comes up with a creditworthiness score and detailed reports. Based on the outcomes, lenders can make data-driven underwriting decisions.
4. Strengthen Fraud Detection Capabilities
In the face of rising loan fraud, lenders that leverage superior AI-powered loan management systems can detect unusual transaction patterns early on.
- Such patterns can help weed out the early signs of fraudulent transactions, funding for criminal activities, and inflated revenues through practices such as circular transactions.
- Lenders can also understand past credit behaviours and isolate incidents of bank overdrafts, late/ non-repayment of EMIs, and cheque bounces.
Access to such capabilities helps further strengthen the accuracy of underwriting decisions.
5. Automate Compliance
Regulatory bodies such as the Reserve Bank of India (RBI) are becoming more stringent in the implementation of guidelines. Lenders that have failed to do so face consequences such as suspension of services, and massive fines.
The use of cloud-based AI-powered loan management tools can help lenders automate compliance across the loan cycle. Lenders can ensure that they have enough liquidity as per guidelines.
They can refrain from predatory practices and function within the confines of the law, which paves the way for a sustainable corporate loan portfolio.
6. Accelerate the Financial Data Collection
Lenders can take advantage of the growing bank aggregator network to ensure that borrowers’ financial data can be automatically pulled via bank aggregators.
This framework automates the process, reduces data gathering delays, and ensures the borrower’s consent. Access to a borrower’s complete data paves the way for superior financial analysis.
7. Customise Loan Products
Corporate borrowers come from diverse sectors and practice various business models. Hence, their needs are extremely diverse.
By tailoring corporate loan products to their unique needs, lenders can deliver relevant solutions, and deliver more long-term value to corporate clients. The use of superior cloud-based software helps to automate and expedite the entire process, making it more efficient.
8. Build a Robust Debt-Recovery Framework
Lenders must have a comprehensive strategy for recovery of outstanding debt that kicks in early on. Some best practices include:
- Continual monitoring and reporting on EMI repayments
- Allocation of delinquencies to experienced corporate loan recovery agents
- Follow-up communication with defaulting businesses
- Potential renegotiation of terms when required in specific cases
Today, these processes can be fully automated to ensure that delinquencies are instant, with a customer-centric approach that drives repayments.
Key Takeaway
The corporate loan segment offers opportunities for growth and expansion for lenders. It also comes with risks such as the growth of NPAs, reduced liquidity, and penalties for potential non-compliance.
By adopting best practices such as diversification of portfolios, data-driven financial analysis, trend forecasting, and customised solutions, lenders can protect their businesses against unnecessary risks.
The adoption of tech-enabled tools, such as a loan management system, enables lenders to automate processes, bringing efficiency, accuracy, and speed to corporate loan operations.
Finezza offers a cutting-edge micro loan management software tool that streamlines lending processes. It automates applications, credit assessments, and approvals, ensuring security and compliance.
It also harnesses AI to provide tailored analytical solutions, enhancing loan decision-making, reducing lead-to-loan time, and effectively evaluating creditworthiness for faster loan approvals.
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