Imagine if day-after-day and year-after year you threw out 40 percent or more of the food you had worked hard to buy. You have carried that food home, unpacked it, stored it and then disposed of a good portion of it. Once you realized the amount of waste you would immediately take steps to change the situation dramatically. You would rethink why you bought certain items and skinny down the shopping list. Some food always gets thrown out, but the number should not be anywhere near 40 percent.

 

 

Recently, I have spoken with a cross-section of small business bankers concerning issues related to their sales and marketing focus. When I asked them what percentage of deals are brought into the credit process and then turned down, most answered 40-45 percent. Some could not even answer what is a very basic question.

 

Banks have spent millions on sales management systems, compensation strategies, and related activities. Yet, not far from half of their loan apps fall to the wayside. Years ago, pre the technology revolution and the belief (propagated by technology salespersons) that CRM would lead you to the promised land, the typical response of bankers to that question was: 40-45 percent. Zero improvement but at greater cost.

 

The fact is that bank management has failed to provide sufficient direction to its bankers. Even when they have set parameters, most banks allow bankers to ignore them or bring in exception after exception. Many banks may provide guidelines but obviously allow bankers to largely ignore them. But at what cost in dollars and time spent? 40 percent rejects means that the underwriters and line bankers have likely spent 40 percent of their time (and sometimes more) on dead ends.

 

Why do bankers bring in deals that even they believe might be rejected? First, they are following the “see if it sticks” philosophy of selling. They hope they can sneak some deals through and get earnings credit for them. But if their performance reviews and compensation programs penalized them for doing so, this approach would end. Second, at some banks the parameters that are established are hazy or unclear, encouraging bankers to bring in whatever they can. Third, in many cases banks without industry or product specialties are desperately competing against other banks. Many banks are operating without a distinct competitive advantage. They are commodity lenders in a world in which those types of lenders will suffer unless they operate with a very low cost base and very strong risk procedures.

 

The fact is that all the technology that banks have introduced has had no impact on reducing the reject number because improvement in this area requires management action and not software. Among other actions, management has to do the following:

 

* Ensure close communication between the line and credit/risk areas so that each understands the other’s concerns,

 

* Allow the risk management area to set and communicate limits for specific industries and types of loans,

 

* Provide increased support/loan checklists to branch personnel; at many banks they are the greatest source of rejects,

 

* Make approval rate percentages an important part of the review/comp process,

 

* Hold team leaders responsible for a banker’s performance in this area and make this criteria part of his comp, and

 

* Consider whether a focus on increasing loan goals is realistic.

 

 

A worse case scenario is one in which the banker says that the constraints set by risk management eliminate the ability to make loan/revenue goals. A cooperative relationship needs to exist between credit and line staffs. In addition, given the current lending environment, management may need to rethink its loan emphasis to put a greater focus on non-lending activities. The fact is that today the best small and lower end middle market loan targets are also among the most resistant to borrowing. The best customers are exercising greater credit restraint; conversely, those that most want to borrow are often least attractive to the bank, since many banks have narrowed their definition of an acceptable credit. It can be no surprise that credit goals are hard to meet and that lenders bring in long-shot transactions. Human nature.

 

If banks can bring the reject rate down to 20 percent from 40, simple math says that loan volume could go up by one-third per person. If the loan opportunity potential does not exist, resources can focus on other product sales or, alternatively, some staff reductions might be possible.

 

Banks that have 40 percent rejection are operating at a significant competitive disadvantage to their best competitors. And they are wasting a lot of money that their shareholders and Boards should insist on being better used.