Exit Strategy. In the recent financial crisis, community banks often found it difficult to quickly and profitably dispose of CRE acquired when a real estate borrower defaulted. However, it can be even more difficult to secure and then dispose of accounts receivable, inventory, or property and equipment acquired when a CI borrower defaults. Often, a community bank may find that an effective exit strategy for CI collateral involves third-party vendors, such as factoring companies that specialize in this area.
Monitoring and Reporting
Bank management should develop reporting to track specific elements of CI lending, such as accounts receivable and inventory valuation at the individual loan or line level, over-credit-line reporting, as well as CI sub-category reporting. CI sub-category reporting is particularly helpful in assessing concentrations in CI lending. Given the variety of industries, business cycles, and collateral in a community banks CI portfolio, measuring concentrations at the sub-category level will provide management with better indicators of concentration risk.
Internal and external loan review, as well as internal audit, should provide assurance that CI loans are underwritten in accordance with policy, that credit administration activities are timely and comprehensive, and that emerging portfolio issues are identified promptly. A bank may choose to focus its review efforts on CI loans originated in the previous 12 months, those with larger-dollar credit exposures, borrowers with a history of frequent delinquencies, and borrowers with a history of covenant violations. Bank management may also need to consider outsourcing some aspects of internal audit if current audit staff does not have sufficient experience to audit CI lending activities. Continuer la lecture de Acknowledging that defaults will occur, management should identify a strategy to exit nonperforming CI loans