Measure Lending Success with Risk-Rating

By Steve Miller

Shrinking margins heightens importance of credit quality.

How do you measure the success of your loan portfolio? For most credit unions, success is measured in growth.

But with ever-shrinking margins, the measurement of your portfolio should include an assessment of loan quality based on the current credit quality and interest rates earned.

For lenders that risk-rate their loan portfolios, there is a quick approach to measuring the loan portfolio’s credit quality. This is done by reapplying the current loan policy guidelines to all of the loans in the portfolio.

This analysis should include a rescoring of the credit scores and measurement of the loan to value on collateralized loans. Then, based on the results of the credit scores and the current loan to values, you can reapply the interest rates you would have used if the loans were underwritten today.

Once you have established the current rate that is earned and the rate that would have been earned, you can perform a net present valuation of both portfolios using the stated maturity. If your portfolio is trending as higher-risk, you will get a lower net present value on the reassessed portfolio.

Lenders that don’t risk-rate their portfolios may need to perform more a comprehensive evaluation of the loan portfolio. This can be performed using a multi-dimensional analysis that will help you identify specific, embedded losses in the portfolio at the loan level.

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