Asset-based lending: The post-crisis landscape
While certainly welcome given what has happened with both residential and commercial real estate over the past few years, this shift in emphasis to C&I loans could lead to some unforeseen consequences.
John Barrickman has worked in commercial lending for more than 40 years, during which time he has served as a front-line commercial lender and as a bank CEO. As the president of New Horizons Financial Group, a financial services industry consulting firm headquartered in Atlanta, he has a unique perspective on today’s commercial lending landscape in light of not only the past three years’ developments, but developments over the past 30+ years.
“Most banks, and community banks in particular, traditionally focused on CRE and ADC loans,” says Barrickman. “With what has happened in real estate and the new regulatory guidelines, many are now starting to migrate back to C&I loans. What I’m seeing, however, is that many bankers’ C&I lending skills have deteriorated and many CRE lenders are having a hard time making the transition. I’m getting lots of calls from banks saying they need to grow their C&I loans and their lenders need more training.”
“There’s no question that fewer bankers today are formally credit trained like those of us who’ve been making commercial loans for 20 to 30 years or longer are,” notes Covington. “Lots of commercial bankers can do a loan on a building, but the advantage today goes to the lender who really understands what C&I lending is all about.”
A Familiar Scenario
The scenario Barrickman often sees looks like this: A bank has a long-time customer that has survived the recession and financial crisis, but it can no longer lend to the business using traditional C&I lending techniques because the leverage is too high, liquidity is strained, etc. “From the banker’s perspective, the business is no longer creditworthy.”
In this situation, banks need to exercise more control over the collateral, but they often don’t have the staff, infrastructure or systems required. “Banks need to properly monitor and manage these types of loans, which includes having systems for understanding and controlling the collateral and monitoring the borrowing base,” Barrickman adds. “And they need lenders that can go out and look at the collateral periodically to make sure it’s actually there and is of the quality it’s supposed to be. There’s more to it than just counting boxes.”