Commercial Real Estate Vs. Commercial & Industrial: Challenges and Opportunities
By Mary Ellen Biery, July 7, 2017
Volume of commercial real estate (CRE) and commercial and industrial (C&I) loans trended high through 2016 and early 2017, and many U.S. financial institutions remain focused on expanding these two areas of lending. A 2016 Sageworks poll of bank and credit union professionals found that 42% named CRE lending the primary focus for growth in their 2017 loan portfolio, while 39% pointed to C&I lending as the core of their growth strategy.
Whether a credit union ultimately favors growth of C&I loans or loans secured by CRE, prudent credit unions can ensure portfolio security by incorporating best practices for lending strategy, the origination process and portfolio management.
Executive teams at credit unions often view business loan growth as a way to strengthen relationships with their existing membership and local communities while outpacing the growing costs of compliance. Some credit unions are also targeting increased member business lending in the wake of a rule change by the NCUA in January, which implemented a principal-based approach to MBL.
In pursuit of MBL growth, however, credit unions must consider how some types of business lending (such as asset-based lending) require more frequent monitoring of the member business to ensure sufficient cash flow for payments. This process change often requires resource reallocation if they expand their member base. As an example, consider the increases in documentation that would be required if quarterly financial statements are due from the member business; analysts may spend hours simply collecting the documentation and then added time entering or spreading the information appropriately.
These expanded steps reduce the time available for analyzing the spreads and relevant trends, and reviewing them with the loan committee to identify risk.
Credit unions can more efficiently grow the business loan portfolio through automation. For example, online loan applications can cut down on document chasing for initial loan requests, and electronic signatures and electronic document uploading improve the member's experience throughout the application process and the life of the loan, allowing them to skip unnecessary branch visits. Other credit unions are implementing loan decisioning software tailored to the institution's risk appetite for a specific type of MBL. With each of these technologies, the institution is also digitizing the process, which makes it easier for the institution to scale without undue reliance on paper or reporting limitations.
Just as business loans have risks and rewards, so do loans related to commercial real estate, whether they are construction and land development loans, commercial mortgages or loans to purchase multifamily residential buildings. One of the attractions of CRE lending is that the dollar amounts involved are typically large, which helps the credit union more quickly cover the cost of origination than may be the case with smaller business loans.
For the full story featuring Sageworks, visit Credit Union Times - Commercial Real Estate Vs. Commercial & Industrial: Challenges and Opportunities.