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

Rabobank Bronnenarchief

RBO7 | 1996 | | pagina 8