Managing credit risk
Credit Audit -
INDISPENSABLE ROLE
8
working relations
WHAT'S NewS Issue 3 March 1996
Over the last decade, Rabobank has undergone a remarkable metamorphosis;
pushing beyond its Dutch agricultural origins, planting fresh shoots into foreign
soil, and expanding its overall banking terrain. Now, the organization confronts
the challenges inherent to managing this success. As it grows, Rabobank is
confronting that timeless dilemma of bankers everywhere in a new way; namely,
how do you optimize the allocation of your assets, and strike the most
auspicious balance between growth and portfolio integrity? Some of the
answers lie in solid credit risk management.
Alfons de Weerdt
Rabobank's
successful inter-
nationalization,
combined with new
initiatives in
industrial speciali-
zation, have
combined to trigger
a virtual explosion
of new credit
activity. The cliënt
profile is widening
- both front a
geographical and
sectoral perspective
- and the absolute volume of business is
accelerating as well. The annual number of
corporate loan applications flowing from
the foreign offices through Utrecht
increased by 1,200 to 2,800 in the five
years through 1995. Over the same period,
the bank experienced organic growth of
some 10-15 percent each year as well.
Alfons de Weerdt, who runs the Credit
Secretariat in Utrecht, recalls that 'there
was one meeting when the credit committee
had to decide 45 applications - and each
was about 10 pages long. Every member
had been up late at night working their
way through a massive stack of paper. Just
imagine if you have to do this two or three
times a week. Eventually, you might
wonder whether you're producing balanced
judgments in each and every case.'
RIGHT BALANCE
The growing volume of business is one
reason why the credit approval process is
now being streamlined. The thrust of the
effort is threefold. It will touch upon the
organization, the decision-making
procedures, and the oversight methods to
be used. The ultimate goal, as always, is to
strike the right balance between loan
quality and portfolio growth. At present,
each foreign branch has a certain lending
authority which determines total
permissible exposure to each cliënt.
Beyond a certain level, the applications are
sent to Utrecht for final disposition. There
are three headquarters credit committees:
one to deal with applications generated by
the international network, another for
corporate customers from Holland, and a
third to deal with really big loans
throughout the Rabobank organization.
VETTING APPLICATIONS
As of this coming April, the two smaller
credit committees will be merged into a
single entity. This move represents a
further step in the organizational changes
inaugurated last year. It began with the
formation of the Credit Secretariat to help
relieve the credit committees of some of
their burgeoning workload. The task of
the Credit Secretariat is to vet
applications, to play a more active role as
intermediary (for example by raising
questions with the branches themselves),
and to act as a filter so that the main
credit committees' attention can remain
focused on the essential points.
COMMON FRAMEWORK
The Credit Secretariat tests applications
against policies decided by the central
banking sector, considers the quality of
clients, and judges the analysis that
accompanies recommendations. Chaired
by Bert Steketee, it will also begin deciding
on applications itself. This coincides with
changes in the credit management
procedures. Alfons de Weerdt explains:
'Our first effort was to create a
framework of reference. That is, when you
test an application, what is the policy
against which it is being tested? We startedj
by producing a Standard credit manual in
cooperation with a project group in
Utrecht, New York, London, Singapore
and Hong Kong. It is a dynamic manual -
continuously updated. It lays out the
current credit philosophy, the credit
policy, and the risk priorities.
POLICY AND PHILOSOPHY
'Let's say, hypothetically,' De Weerdt
As mentioned above, successful banking depends on striking a balance between
growth and loan quality.The oversight functions of the Credit Audit
Department, a section of the Internal Audit Department of Rabobank
Nederland, play an indispensable role here as well.
Willem Louwers, who,
together with Dick Duit,
runs this department out
of Utrecht, is acutely
sensitive to the influence
of worldwide lending
cycles on the quality of
the portfolio. 'At one time
or another, every bank on
the market will experience
credit losses,' Louwers
says. 'If they are hit hard,
they tend to retrench, and
to develop a kind of "never again"
mentality. As a result, they will be very
conscientious and accept only loans of
shorter maturity and lower risk. What we
then tend to see, however, is that the
market inevitably starts to move up.
Willem Louwers
Competition gets more
stiff and there are
narrower spreads.
Everyone is a bit leaner
and has a great thirst for
business. The temptation is
to lengthen maturities and
lower the credit Standard -
but this just brings you
back around full circle.
When thirsts are running
high our tash is to help
balance temptation with
temperance.
BESTTEAM
But Louwers is no tee-totalling auntie. He
understands that when a foreign branch
moves into a local market, it has to gain