Risk Rating Loans is Not a Simple Process, but a Solid Methodology is a Good Start
T. Gschwender & Associates Inc.
311 Montgomery Street, Suite 1
Syracuse, NY 13202
T. Gschwender & Associates, Inc. is a diversified consulting company that has been providing services to financial institutions and businesses in the Northeast United States since 1984. Our financial institutional clients include small community banks and credit unions with less than $100 million in assets to much larger regional institutions with over $5 billion in assets. Our business clients include small sole proprietorships to middle- market privately held corporations. T. Gschwender & Associates, Inc is a privately held company that was started by Tom Gschwender on November 9, 1984 and purchased by Bharpur “Bo” Singh on April 1, 2008.
Given the number of recent financial institution failures, banks would benefit from taking a hard look at their loan review function. Ask yourself: Are you getting the same report year after year without recommendations to help you strengthen your credit risk management practices? Are your loan review consultants providing you tools to help you do your job better? Do they even have a methodology to risk rate loans, or is it simply their opinion?
Risk rating loans is not a simple process. If it was, some of these failures wouldn’t have occurred. To properly risk rate a loan, many variables must be considered. For example, although the debt service coverage ratio (DSCR) may be less than 1.00, that does not necessarily mean the credit deserves a criticized (special mention) or classified (substandard, doubtful or loss) risk rating. Suppose the borrower has excellent liquidity and collateral protection is good. What would be the risk rating now? What if the borrower is in an industry that has been significantly impacted by current economic conditions … how would that impact the risk rating?