How to stay committed to your lending program during a crisis

The dramatic meltdown of some of the leading financial institutions in the country in the last few years has been because of the steady decline in the quality of their corporate loan portfolio. This has been attributed to some sections of the industry having seen adverse performance which in turn affected their ability to keep up their promises to pay. Following this was the Bank's inability to dispose off the collaterals associated with the loan. This has triggered a crisis of confidence between the banks and the enterprises to which they lend. Lending in an environment deficit of trust is tough and to stay committed to a lending programme requires among others the following

1. The pooling of the wisdom of credit underwriters handling various industry segments into a "body of Knowledge"
2. A mechanism  to apply these consistently to every loan proposal
3. A mechanism for the enterprises to adhere to compliance by submitting periodic reports of their performance
4. and finally a mechanism to glean information and metrics from the information submitted by the enterprises, and that available in industry portals to determine if the loan asset is stressed

The primary reason that this is easier said than done is because systems have taken the form of monolitic structures making it difficult to propagate changes especially when it comes to business rules. But these are things of the past. Today, Cloud technologies combined with principles like the 12-Factor app and microservices principles remove the problems associated with monolitic application architectures like Enterprise Service Bus and Message Oriented Middleware (MOM). Instead today's applications offers Banks and Financial Institutions to define their workflow and rules. 

1. Having a rule repository allows the Bank to pool the wisdom of credit underwriters into a body of knowledge.
2. These individual rules can then be used to tailor the workflows for each financial product especially loans so that they are consistently applied to each loan proposal 
3. The rules from the repository can "whine"  whenever enterprises don't submit their reports periodically and trigger notifications to the bank management
4. The rules can also compare the data from the submitted reports with any thresholds defined and "red flag" when certain thresholds are breached.

Establishing a rule repository for your Institution

Most institutions have a standard operational manual that has the procedure for evaluating a proposal. This is where most of the elgibility norms and credit norms are specified. Not every institution is the same, they differ in the way the specific balance sheet items are taken for computing the financial ratios. You can glean the method of calculating these for your institution

• Debt burden ratio
• Book Value (including revaluation reserves and excluding revaluation reserves)
• Debt To Equity Ratio 
• Profit Before Dividend Interest and Taxes
• Profit Before Interest and Taxes
• Profit Before Taxes
• Net Profit

Once you have these you can record it on a spreadsheet. 

Creating a body of Knowledge

Once you have the rules in place you will need a BPM engine to create the rules and a repository. With a rule repository, credit personnel can create a repository of eligibity norms and credit norms in an atomic fashion. Being atomic these rules  can be strung together to form a string of rules, which can be then attached to any of the financial products. There are several popular OpenSource BPM tools that you can use to establish your repository

• Activiti Business Automation
• Red Hat Process Automation Manager

What makes them appealing to financial institutions is that these rule engines are available at costs that are far lower than those that they were available a few years back.

Getting started on your Rule Repository

Now that we have seen the benefits of having a rule repository and a few BPM tools that can be used to establish your respository you can experiment with them. Having a rule repository allows your institution to venture into newer areas and seek fresh proposals because the rule repository is applied on every proposal without fail. If you would like to see a ready made rule repository and the impact they have on your lending programme you could start by downloading our presentation

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