Active Loan Portfolio Management: Stages of Implementation
Asarnow, Elliot, The Journal of Lending & Credit Risk Management
In "Best Practices in Loan Portfolio Management," published in the March 1996 Journal, I described active loan portfolio management as an effort to evolve from the traditional, highly subjective originate-and-hold approach of lending to a more objective approach of assessing risk and return and a continuous effort to maximize portfolio value. This new approach includes selling loans already on the books and buying loans on a purely investment basis - not only for relationship considerations.
The article described an overall loan investment analysis process and the various tools that can assist in that process, and quantified the benefits of implementing an active loan portfolio management approach. The time, effort, and resources involved in implementing a sophisticated loan portfolio system may seem daunting, but the effort can be richly rewarding in terms of performance improvements.
This article discusses the four stages through which organizations may pass along the multiyear path to full implementation of active portfolio management. The focus is on organization issues, not tools. Laying out these stages may assist others in prioritizing the tasks involved.
The issues in a given stage may not be fully resolved by the time the next stage is reached. Each stage is associated with substantial change in organizational structure, performance measurements, and management processes. The political challenges are particularly formidable, so this article is offered in the spirit that to be "forewarned is to be forearmed." In fact, progress depends on vigorous, persistent, and visible support from senior management.
Stage 1: Foundation Building
Any initiative to establish a loan portfolio management system must have a senior-level champion. The champion will embody the organization's long-term vision of implementing loan portfolio management. He or she must be sufficiently senior to ensure that adequate financial resources are available and that a capable, analytically oriented person is assigned full time to oversee day-to-day implementation.
Building the foundation of a loan portfolio management system involves defining initial information requirements and organizing data collection, including developing a credit risk database and a risk-rating system.
A key to success is anticipating and responding effectively to the inevitable resistance to change. It does not take long to discover the inadequacies of the data that reside in product processing and financial systems. One of the larger challenges is communicating to the operations group the importance of portfolio management information. There may be a tendency for people involved with mainframe billing systems to view portfolio management information as academic or somehow less worthy than the information they currently process. The distributed processing and personal computer applications associated with portfolio management tend to be viewed with suspicion. Establishing a separate group within the portfolio management organization, independent of the operations group, to oversee data quality control and to define data requirements is important.
Initial data for any new database inevitably will be less accurate than desired. Data quality can be improved by:
* Clearly assigning responsibility for individual data elements.
* Implementing quality control reports.
* Circulating reports to the responsible parties.
It helps to focus on cleaning up a small number of data elements rather than trying to do everything at once. An important underlying issue is that the providers of the data may not see themselves as the primary users of the data. Preaching the importance of portfolio management will help and so will circulating summary data-quality reports to senior management.
There is risk of a vicious circle forming in that portfolio management data initially may be too inaccurate to use for decision-making, but the data will never become reliable unless the people providing it see that it is used as a key decision support tool. …