Jack Henry & Associates: Your Top 3 Loan Growth Challenges – Solved

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Eighteen months ago, few could have imagined the changes in our world that would occur in 2020 and 2021. The pandemic has brought the greatest challenge to the global economy since the Great Recession. This roller coaster ride has created challenges and leaders of the left bank and credit unions are wondering how to respond. What approach would achieve their goals in terms of borrower support, income generation, portfolio growth and credit quality in the years to come? There are three hurdles to overcome.

# 1 – Compression of the net interest margin

Banks and credit unions are now teeming with deposits, but the main challenge is the continued squeeze in net interest margins. From the first quarter of 2020 to the same period in 2021, the net interest margin of financial institutions with assets of less than $ 1 billion fell from 3.69% to 3.37%.

With these low margins, banks and credit unions should look for ways to promote loan growth. More loans on the books can make up some of the shortfall. The good news is that the demand for loans is high. Now that the PPP funds are exhausted, companies are again looking for financing for short and long term working capital, equipment, etc. With low interest rates and unprecedented federal support for loans to community institutions, the trick isn’t to convince consumers to borrow – it’s to win the finance race.

Along with the increase in the number of loans, there is the strategy of reducing loan management fees. Commercial loan origination software produces operational efficiency in banks and credit unions that can save between 30% and 70% on major back office workflows. Automation also allows loan officers and bankers to spend more time helping borrowers and generating inbound referrals.

# 2 – Increased competition from fintech

To win the finance race, banks and credit unions need to come up with attractive and efficient ways to get a loan. Many financial institutions lose more loans than they generate because potential borrowers abandon the long and tedious application process before they complete it.

Cornerstone Advisors reports that in a recent survey of 184 financial institutions, “more than half of organizations have lost more than 75% of potential lending activity”. They lose two accounts (or loans) for each account (or loan) opened.1 Instead, borrowers will go for a fintech that offers a straightforward process. As more and more digital banking alternatives become available, the potential for a consumer to switch to a competitor will only increase.

Bank CEOs recognize the problem. A survey carried out in 2021 among the heads of financial institutions asked the question; “What’s the biggest headwind hampering your lending success in 2021?” The second most popular response was “Meet demand for Amazon-like experiences.”2

Simplified online loan applications are not only faster and more attractive, but they increase volume by allowing borrowers to apply when it is most convenient for them.

# 3 – manage risk

Credit risk issues have arisen in the wake of the pandemic. For example, what will happen to commercial real estate when so many workers are now home based? As office leases expire, there will be adjustments in the market. Banks and credit unions currently hold nearly $ 2 trillion in commercial real estate loans. The losses could be significant for financial institutions with high concentrations of CRE loans.

One answer is to integrate loan stakes into long-term growth strategies. This provides the opportunity to complement organic growth to help meet revenue generation and credit standing goals.

General economic strains on small and medium-sized businesses in 2020 and 2021 could also challenge credit risk. For many industries, lenders must now underwrite new applications and renewals in an environment of weaker balance sheets. Community-driven institutions with the technology to manage these risks will have an advantage over others, allowing for a more diversified portfolio and revenue stream.

As P3s and other stimulus programs run their course, small business owners will once again seek financing to fund new growth. This represents an opportunity for banks and credit unions to step in, helping to finance recovery and expansion. It also gives lenders an opportunity to diversify their portfolios, which has been difficult for many during the pandemic.

When considering which sectors are likely to stimulate loan demand, it is worth paying a close eye to those who accounts receivable and inventory. While these businesses have the potential to grow, it is likely that they will need a source of short-term working capital to make this opportunity a reality. Institutions with the appetite and the right technology to handle an increase in business will be well positioned to strengthen client relationships and generate revenue.

Go forward with a sense of purpose

Through all of these challenges, bank and credit union leaders must ensure that their organizations honor the mandate to serve their communities and improve the borrower journey. Community financial institutions have a proud history of resisting problems while continuing to serve. The current context is another opportunity to show their dedication.

Disclaimer

Jack Henry and Associates Inc. published this content on October 14, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on October 14, 2021 01:21:05 PM UTC.


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