Magazine article American Banker

In Tough Times, Get Aggressive in Collecting Bad Loans

Magazine article American Banker

In Tough Times, Get Aggressive in Collecting Bad Loans

Article excerpt

Losses are an inevitable part of lending.

This makes banks different from the manufacturer and service companies, whose objective is maximize revenue through sales of products and services.

To meet profit-growth objectives, a banker must boost both loan outstanding and spreads. Yet that same banker must also work to reduce risk.

The focus on cutting expenses has resulted in smaller staffs at banks. That has led to a rise in the number of customer per commercial loan officer.

A Case of Neglect

The account manager must keep as many balls in the air as possible. When one falls to the ground - in the form of a bad loan - it usually becomes another area's responsibility.

This area is collections. One has to wonder why the function that can have the greatest impact on a bank's bottom line has been so neglected. Nothing generates a higher return on capital than the recovery of assets already written off.

The decline in operating margins further dramatizes the opportunity. Before beginning to recover in the second quarter of 1991, the industry's spread between lending yields and funding costs shrank for the 100 largest U.S. banks, from over 4.8% in 1985 to under 4% in 1990.

Recovery Rate on Bad Loans

The best reflection of a bank's record on collections is its workout efficiency. Note on the graph that the ratio of recoveries to chargeoffs has declined significantly. Recoveries may be expected to be lag behind, in that loans must be written off before they can be recovered. …

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