As the coronavirus pandemic continues to develop, we are already seeing some very troubling signs in the economy. Unemployment claims continue to spike as the crisis hammers away at the U.S. economy. Suddenly, we have millions of people who are unexpectedly out of a job, with the leisure and hospitality industry being hit the hardest.
Many small businesses are closing, and jobs are disappearing in the COVID-19 economy. We’re also starting to see a tightening in the credit market – and while banks won’t stop lending, they must re-evaluate their current credit policies and strategies.
In part one of my blog series, I talked about the steps that small banks and credit unions can take to help their clients adjust in these challenging times. In this blog post, I want to offer some insights on how banks, credit unions, and other financial institutions with small business portfolios can protect their portfolios while helping customers through the coronavirus crisis. Banks can (and should) adapt and prepare for the economic volatility.
Organize, Prioritize, and Engage
The outlook may seem bleak, but it’s critical to remember that this is a temporary problem. In order to ride out the storm, lenders will need to pay immediate attention to specific priorities. Banks should be re-evaluating their portfolios, so they can systematically address the needs of their various customers. Patience is also needed—larger banks need time to pivot and smaller banks need time to ramp up.
Some clients will need more consideration than others, and a certain degree of “triage” will be necessary. This means organizing accounts and prioritizing the most urgent items and tasks. Engage customers, make sure they know you’re trying to help them, and accommodate wherever you can.
You should initially segment your accounts into three groups:
- Those currently delinquent.
- Those that have gone delinquent in the past or have exhibited slow payment.
- Those that have excellent payment history.
Once the accounts are segmented, you can figure out what you need to be doing for your portfolio.
Group 1: Currently Delinquent
This group consists of accounts that are currently delinquent. This group should be very small. Engage the client and encourage them to pursue a Paycheck Protection Program loan (a.k.a. PPP loan) or a COVID-19 Economic Injury Disaster Loan (a.k.a. EIDL) through the Small Business Administration (SBA), if they qualify and meet the requirements.
However, you should probably assume that most of these accounts will never cure. If any of them are also deposit customers, you can act accordingly and work with that side of the bank to try to protect these accounts, as well. According to a recent LendingTree survey, “8 in 10 small business owners have no idea where to get emergency funding for their business right now.” Be proactive and provide guidance to your customer base, especially to those with the most need. This is both helpful and self-serving. The PPP loans free up capital helping the small business meet its needs, one of which is paying their debtors of which you are one.
Group 2: Past Delinquencies or Slow Payments
This group includes accounts that have gone delinquent in the past, as well as accounts that have exhibited slow payment. Engage the customer and encourage them to pursue a PPP loan or EIDL through the SBA, if they qualify and can meet the requirements. For those in this group who are also deposit customers, you should conduct an analysis of their deposit account (e.g., a 12-month rolling report of deposit balance history). For the last three months and for the foreseeable future, the velocity and amount of deposits should be analyzed for all Group 2 clients.
At this point, portfolio monitoring is key and should be done on a monthly basis until the economy settles down. If you can monitor the business through its deposit activity, you should track the deposit stability of these accounts and benchmark their cashflow as of March 1st. Offer any contractual deferments and accommodate where you can – but don’t spend too much time here, because you will likely lose some (or most) of these accounts.
Group 3: Excellent Payment History
This group consists of accounts with excellent payment history (i.e. your A and A+ customers). Focus on these accounts and see if they’re willing to provide short-term loans.
Also, consider the type of business you’re looking at because some of these businesses will be in a better position than others. Again, portfolio monitoring is essential here, so you should do everything mentioned in Group 2 for these accounts, as well. You should expect to increase the frequency of portfolio monitoring to a monthly basis for the foreseeable future.
The LendingTree survey reports that “69% of small business owners do not have enough cash on hand to sustain their business for the next 90 days.” Expect to see businesses that are current to suddenly not be current.
Looking Ahead
Many businesses are disappearing due to the fallout of the coronavirus pandemic, so lenders and borrowers need to work together. You should give the businesses that can survive the opportunity to survive. It should be no fault of the bank if an account is lost because the bank did what they could to help.
That said, it is also your job to protect the bank’s portfolio. Shore up your credit criteria but look internally and consider what types of services your bank offers. Most small business owners prefer to use their community bank, assuming the bank helps them.
There will be a tomorrow, and many of these businesses (or at least the business owners) will come back eventually – will they come back to you? A year from now, it’s going to matter how banks treated people today.
In my final blog post of this three-part series, I will discuss what’s next for small banks in this uncertain landscape and how we can move forward. It’s a mess, but we’ll get through it.
