A recent American Banker article, No Business Like Risky Business for Regional Banks, discusses the various ways regional banks are diversifying their services in an effort to offset the decrease in their core businesses, including commercial lending.
While diversification can be good for business, it can also be risky. Meanwhile, many banks are missing out on solid loan opportunities in commercial lending. Some banks have been lending only to companies that they perceive as “rock solid” i.e. larger companies with relatively easily analyzed and mitigated risks. Favoring large, lower-risk companies while shying away from providing small- and medium-sized firms of the credit they need to grow, however, impacts not only revenue opportunity for banks but also the global economy. These small- and medium-sized companies generate the most employment and economic growth in nearly every country.
However, because there is no useful credit risk transfer option for smaller loans, lending institutions know that they can’t trade out of them and instead must bear the entire risk, creating a temptation to steer clear of multiple, harder-to-understand small- and middle-market loans in favor of fewer larger but safer credits.
With proper training, however, banks can make smart assessments of small- and medium-sized business loan opportunities and not only provide more lending opportunities in the current lean climate, but also build relationships that will grow with these businesses.
In the United States, a push by the SBA and the White House to help underwrite certain small business loans means the risk is often reduced on these ventures. The combination of that support and training can create a winning segment of business for any bank.
For more on the conditions affecting the current market and how small business relates, visit Omega Performance’s Maximizing Results, Minimizing Risk paper. For more on available training in commercial lending, including the new Building Small Business Acumen program, visit Omega’s commercial lending page.
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