small business lending outlook
Post on 12-Jan-2017
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Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
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SMALL BUSINESS LENDING OUTLOOKFROM THE RMA CREDIT RISK COUNCIL’S2016 INDUSTRY INSIGHTS
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
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ENSURE CAPITAL AVAILABILITY
Ensuring capital availability for entrepreneurs is foundational for
financial institutions—regardless of size or location—and is
consistently referred to by business owners as one of the key
components of any successful banking relationship.
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ENSURE CAPITAL AVAILABILITY (CONT.)
A recent Small Business Credit Survey* illustrates the importance of capital availability.
The survey finds that “traditional bank lending continues
to be the primary source of financing for small businesses.”
*The survey was conducted by several Federal Reserve Banks.
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ENSURE CAPITAL AVAILABILITY (CONT.)
At the same time, the overall amount of lending to small
businesses* within the banking industry has fallen.
*As defined by most publicly available data (loan amount or company size being the most-widely used).
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ENSURE CAPITAL AVAILABILITY (CONT.)
There have been several high profile studies and articles
compelling banks to reexamine their cost structure relative to
small business loan origination.
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COMPETITIVE LANDSCAPE
Over the past decade, the landscape for lending to small businesses has become even
more competitive with the entrance of alternative, nonbank
lenders that leverage technology, marketing, and data in an effort to gain market share
from the banking industry.
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COMPETITIVE LANDSCAPE (CONT.)
These firms use unconventional underwriting practices and unique product
features to streamline the credit process for small business owners and
provide funding in as little as one day.
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COMPETITIVE LANDSCAPE (CONT.)
Lenders that leverage their own balance sheet to extend loans.
Lenders that rely on a peer-to-peer model backed by institutional and
individual investors.
Companies that provide a marketplace of options where small business
owners can comparison shop among a variety of lenders.
These alternative financing providers may be broadly categorized into 3 groups:
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ALTERNATIVE LENDING SEGMENT OUTLOOK
• Continued growth of the alternative lending segment and, potentially, new regulatory oversight stem from the following factors:
Explosion of big data.
Ease of use for the
business owner.
Increasing power of
technology.
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ALTERNATIVE LENDER PARTNERSHIPS
• A handful of banking institutions have already announced partnerships with leading alternative lenders in order to harness the benefits extolled by the underlying processes.
• And many institutions are investigating how this new lending channel might support their client base.
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ALTERNATIVE LENDER PARTNERSHIPS (CONT.)
At the same time, the issues of1) ongoing oversight and
regulation, 2) borrower protection, 3) lending compliance, and
4) transparency around loan pricing
are gaining momentum and have resulted in numerous efforts to better understand
this lending segment.
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MONITORING IS ESSENTIAL
Institutions that provide financing in the small business segment will want to remain
vigilant in monitoring 1) the growth of the alternative lending segment
and 2) the level of oversight that is continuing
to evolve.
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THE PACE OF CHANGE AND ITS IMPACT
Small business lending remains a cornerstone for most financial institutions, but the pace of change is quickening and causing
many to evaluate how best to serve the client.
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THE IMPACT OF COMPETITIVE FORCES
The competitive forces are causing many institutions
to reexamine and redouble their efforts
and to stay on top of the many challenges facing small business owners.
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MONITORING THE REGULATORY ENVIRONMENT IS CRUCIAL
Additionally, banks must consistently monitor the rapidly
changing regulatory environment, which might impact
small business lending.
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5 REGULATORY ITEMS TO MONITOR CLOSELY
1. Small business data collection as outlined by
Dodd-Frank Act section 1071.
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5 REGULATORY ITEMS TO MONITOR CLOSELY (CONT.)
2. Potential expansion of regulatory oversight of
alternative/online lenders and the downstream
implications for bank/fintech partnerships
and alliances.
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5 REGULATORY ITEMS TO MONITOR CLOSELY (CONT.)
3. Enhanced scrutiny of fair lending and loan pricing practices
within small business, particularly for clients that operate as sole proprietors.
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5 REGULATORY ITEMS TO MONITOR CLOSELY (CONT.)
4. Increased focus on:• Data accuracy
and consistency.• The types of data
being used during credit evaluation.
• Examination of credit reporting practices (consumer and business).
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5 REGULATORY ITEMS TO MONITOR CLOSELY (CONT.)
5. Execution of consistent practices that lead to transparency throughout
the entire lending process, while maintaining strong risk discipline.
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The Credit Risk Council supports professionals who are responsible for establishing, maintaining, or carrying out credit risk management policies.
The council focuses on funded and off-balance-sheet risk management, including capital markets activity, and other forms of credit intermediation and risk mitigation.
About RMA’s Credit Risk Council
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RMA is a member-driven professional association whose sole purpose is to advance sound risk principles in the financial services industry.
RMA helps its members use sound risk principles to improve institutional performance and financial stability, and enhance the risk competency of individuals through information, education, peer sharing, and networking.
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