7 Keys to Identifying Problem Loans

6/5/2020
7 Keys to Identifying Problem Loans

Managing your organization’s problem loans starts with identifying them. And over the next few months, lenders can expect to see substantially more problem loans than usual.

Use this checklist to start figuring out where your problem loans could arise.

Loan review

1. Loan review 

For the rest of the year, loan review departments should thoughtfully sample loans with modifications related to the pandemic – and look for common themes as they do. They also should adjust risk ratings if they haven’t already and flag loans that likely will require grade changes.

2. Covenant testing

Do you understand the bottom-line implications of borrowers violating terms of your loan covenants, such as maintaining financial ratios? Will their loans go into payment default? What would happen if you called those loans in? Test different scenarios to figure out how breakdowns in loan covenants could affect your portfolio.

Covenant testing
Covenant testing

3. Portfolio analytics

Enhance your portfolio analytics to get a better understanding of your borrowers. You should be able to aggregate data in your credit portfolio, effectively monitor risk and compliance in real time, and automate your portfolio analysis.

4. Delinquencies review

In any market, knowing who’s late in making payments – and who could slip into default – is critical to understanding portfolio risk. Stay on top of this with frequent, regular delinquency reviews and communications with borrowers.

Covenant testing
Covenant testing

5. Annual review

For your largest borrowers, the annual review can help you gain an understanding of their financial performance, compliance with covenants, collateral inspections, and more. Use annual reviews as opportunities to dig into the risks associated with your most important lending relationships.

6. Financial statement receipt and review

You can use borrowers’ deferral and modification requests as an opportunity to ask for their financial statements, projections, go-forward business plan, and 13-week cash flow forecasts. By reviewing their balance sheet and income statements, you can anticipate borrowers’ ability to repay current and adjusted loans.

Financial statement receipt and review
Loan modification tracking

7. Loan modification tracking

Loan modification activities are up among most lenders right now. Your organization should track these modifications to determine if they meet the criteria of the CARES Act or the revised interagency statement released in April. You should also track deferral history and maturity schedules, and use what you gather to inform CECL analysis.
Want more insights on addressing coronavirus-related challenges?
Go to the Crowe COVID-19 resource center for more analysis and updates.

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Dave Keever
Principal