Building Skills to Buttress against Loan Losses

As financial institutions grapple with the fallout from the pandemic, they must consider the critical factors that will help them emerge from the crisis in the strongest-possible position. Undoubtedly, one of these is a skilled employee base that can rehabilitate a distressed portfolio while fostering stronger client relationships.

Many lenders have never experienced a crisis of this magnitude, and even those who have navigated crises haven’t done so in years. It’s crucial that they can make astute, informed decisions as they address deteriorating loans and support clients as their businesses reopen. To achieve these objectives, they must be able to:

In normal times, lenders think long-term—Will this business be able to repay a loan over a 3-, 5-, or 10-year horizon?—and their analysis follows suit. But when a once-solid loan becomes a problem loan, they need to think short-term: Will this business be around in another year or two? If they believe the answer is “yes,” they need the skills to support the client in a challenging environment. If they believe the answer is “no,” they need to focus on minimizing losses.

Many businesses have prospered in recent years, bolstered by a strong economy. In tougher times, lenders need to understand which industries are likely to survive (and possibly even thrive) and within those industries, which businesses will rise to the top as a result of strong, forward-thinking management.

Lenders must be able to accurately assess actual and potential revenue, fixed versus variable expenses, working capital needs, backup liquidity, and solvency. Businesses that entered the downturn highly leveraged or in a tight liquidity position are less likely to survive than businesses with a strong balance sheet and backup sources of liquidity.

Reasonable projections—based on an understanding of the industry, management strategies, competition, product necessity, and, to some extent, historical performance—are more important than ever. It’s not enough to focus on annual projections, though. Depending on the business, weekly or monthly cash budgets may need to be formulated, validated, and analyzed.

Financial statements can take you only so far. In order to uncover newly emerging threats to a client’s business—like increasing supply risk, for example—lenders must be able to ask the right questions. In doing so, they’ll be better positioned to connect industry risks, management strategies, and competitive pressures to expected financial performance.

Knowing what questions to ask is only one piece of the puzzle. Lenders must be able to discuss difficult topics, such as defaults, loan restructuring, and even the client’s own day-to-day stresses and frustrations, with frankness and empathy. They also need to know how to hold forward-looking conversations about the client’s longer-term strategy for getting the business back on track.

Properly structured loans that protect the financial institution and meet borrowers’ needs are key to successful repayment and deeper client relationships. Lenders must be able to structure loans in a way that enables the client to succeed but also mitigates risk to the financial institution.

The good news is that employees can build these skills virtually, substantially reducing the financial and opportunity costs long associated with instructor-led training programs. What’s more, they don’t need to start from scratch: Experienced lenders may already know how to evaluate businesses, conduct portfolio reviews, and structure loans. Now, they need to learn how to adapt these skills to meet today’s unique challenges.

At Moody’s, we’ve invested significant time and energy adapting our content to be delivered via short bursts of virtual learning. In response to the pandemic, we’ve leveraged this expertise to curate a succinct learning pathway focused on the specific skills lenders need right now. Within this pathway, each session begins with a webcast, during which an industry expert introduces the topic at hand, discusses its relevance in the current lending environment, and teaches new, targeted skills that lenders can immediately integrate into their day-to-day activities. The webcast is followed by a short, engaging eLearning course that strategically reinforces practical concepts, and a case study-based activity that gives learners an opportunity to apply their skills to a real-world scenario. Learning can be supplemented, where needed, with virtual workshops.

The return on this kind of training investment evidences itself in fewer write-downs and lower losses. But there are qualitative returns as well: As lenders develop a better understanding of business operations and business risk, and position themselves as resourceful partners in their clients’ recovery, they’ll build stronger, more-collaborative relationships, driving retention and opening the door to new opportunities when and as the economy begins to improve.