All credit people know the 5 Cs of Credit.
But what do the following 7 Cs—Communication, Charm, Consensus, Candor, Curiosity, Collegiality … and Chutzpah—have in common with the 5 Cs?
Answer: the Credit Committee.
Relic or reliable?
Credit Committees are among the oldest and most durable internal credit quality controls. Yet in recent years they have come under renewed scrutiny and criticism, especially from those who tout the alleged advantages of alternative (non-bank) sources of business credit.
There are two principal criticisms of committees we hear regularly these days.
• First, that they take too much time in responding to a borrower’s credit request.
• Second, that they are often just a collection of “yes men” that serve no useful purpose to the banks that still use them in the credit approval process.
To these two objections, I heartily disagree.
Balancing time and prudence
Credit committees, particularly at larger institutions, have been streamlined in recent years and are often in the form of a “lending ladder.” Individuals with the right combination of personally delegated credit authority are able to extend credit up to significant dollar amounts.
The senior credit officer of The Bank of New York in my days in the training program used to say: “If you need an answer right now, it’s no. A ‘yes’ will take a little longer.”
This implies that credit due diligence is a process and not an event. That’s where the 7 Cs of Credit Committees are important.
A little secret you should already know
All lenders are sales people.
Some may not like that characterization. But it’s actually doubly true: Our jobs are to sell our banks and their services to our customers—and then to sell our customers’ deals to the bank. Usually the sort of sale involved is to a credit commitment.
Communication: All credit committees share the need to communicate with the lenders. Through the committee process we communicate our standards, the nuances of our credit policies, and the sense of the level of credit risk that we are willing to accept in our loan portfolios. We share ideas on structure and additional services that might be offered.
Charm is a personality trait and it’s high on the list of desirables for any lender/customer-contact person.
Committees serve as a useful forum for talented younger members to showcase their skills at both analysis and business development to more senior people in the bank. It’s “their time in the sun,” so to speak.
Consensus is something that I have always valued as a by-product of the committee process. If properly nurtured, consensus is a way of embedding standards into a group of like-minded practitioners. A trap here, though, is the possible dilution of individual accountability for specific credit decisions. It’s a balance that we must carefully and continuously seek.
Candor: Loan Review is a key partner along with the credit committee in maintaining a sound portfolio, but that requires candor by the lenders.
Risk should be fully disclosed and properly evaluated. (Perhaps another word describing this is confession.) For the loan review function to work properly, loan officers have to “fess up” to any detected weakness in either the credit proposal or an implicit challenge to anyone to find it among the active credits in the portfolio.
Curiosity: One highly prized personality trait is the curiosity of the lenders themselves. Without a healthy curiosity by the loan officer or the committee as a whole, due diligence can never be truly thorough or complete.
Collegiality: One’s presentation at credit committee should never resemble a gauntlet to be run. Committees should be forums and showcases of collegial behavior.
We are not competitive with each other and we hopefully save our competitive juices and talents for our competition with the other banks in our market that hunger for the same deals and opportunities.
Failure to act in a collegial way will stifle candor and individual initiative and it will undermine trust, confidence, and, ultimately, credit quality.
Chutzpah: No consideration of the value of credit committees can be complete without noting this wonderfully expressive word.
There are some lenders who have the gift—a flair perhaps— for that sort of behavior. They stretch our imaginations, and often make us laugh. And a banker with a touch of chutzpah can reset perspectives among colleagues who are normally conservative in their demeanors and thought processes.
Relic? Not hardly
I’ve often said that if we didn’t have credit committees, we’d need to invent them. They will never be out of fashion, but they need to serve the bank’s institutional needs for risk management and communication and the personal development and nurturing of the lending staff.
The 5 Cs of Credit are only a part of the credit landscape. We need to be sure that the 7 Cs of the Credit Committee serve the right ends of the institutional culture that we seek to inculcate and preserve.
Come to think of it, that’s another important C—Culture—and maybe that’s the appropriate umbrella word for this entire discussion.