small business lending outlook

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

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SMALL BUSINESS LENDING OUTLOOKFROM THE RMA CREDIT RISK COUNCIL’S2016 INDUSTRY INSIGHTS


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ENSURE CAPITAL AVAILABILITY

Ensuring capital availability for entrepreneurs is foundational for

financial institutions—regardless of size or location—and is

consistently referred to by business owners as one of the key

components of any successful banking relationship.


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ENSURE CAPITAL AVAILABILITY (CONT.)

A recent Small Business Credit Survey* illustrates the importance of capital availability.

The survey finds that “traditional bank lending continues

to be the primary source of financing for small businesses.”

*The survey was conducted by several Federal Reserve Banks.


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At the same time, the overall amount of lending to small

businesses* within the banking industry has fallen.

*As defined by most publicly available data (loan amount or company size being the most-widely used).


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There have been several high profile studies and articles

compelling banks to reexamine their cost structure relative to

small business loan origination.


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COMPETITIVE LANDSCAPE

Over the past decade, the landscape for lending to small businesses has become even

more competitive with the entrance of alternative, nonbank

lenders that leverage technology, marketing, and data in an effort to gain market share

from the banking industry.


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COMPETITIVE LANDSCAPE (CONT.)

These firms use unconventional underwriting practices and unique product

features to streamline the credit process for small business owners and

provide funding in as little as one day.


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COMPETITIVE LANDSCAPE (CONT.)

Lenders that leverage their own balance sheet to extend loans.

Lenders that rely on a peer-to-peer model backed by institutional and

individual investors.

Companies that provide a marketplace of options where small business

owners can comparison shop among a variety of lenders.

These alternative financing providers may be broadly categorized into 3 groups:


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ALTERNATIVE LENDING SEGMENT OUTLOOK

• Continued growth of the alternative lending segment and, potentially, new regulatory oversight stem from the following factors:

Explosion of big data.

Ease of use for the

business owner.

Increasing power of

technology.


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ALTERNATIVE LENDER PARTNERSHIPS

• A handful of banking institutions have already announced partnerships with leading alternative lenders in order to harness the benefits extolled by the underlying processes.

• And many institutions are investigating how this new lending channel might support their client base.


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ALTERNATIVE LENDER PARTNERSHIPS (CONT.)

At the same time, the issues of1) ongoing oversight and

regulation, 2) borrower protection, 3) lending compliance, and

4) transparency around loan pricing

are gaining momentum and have resulted in numerous efforts to better understand

this lending segment.


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MONITORING IS ESSENTIAL

Institutions that provide financing in the small business segment will want to remain

vigilant in monitoring 1) the growth of the alternative lending segment

and 2) the level of oversight that is continuing

to evolve.


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THE PACE OF CHANGE AND ITS IMPACT

Small business lending remains a cornerstone for most financial institutions, but the pace of change is quickening and causing

many to evaluate how best to serve the client.


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THE IMPACT OF COMPETITIVE FORCES

The competitive forces are causing many institutions

to reexamine and redouble their efforts

and to stay on top of the many challenges facing small business owners.


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MONITORING THE REGULATORY ENVIRONMENT IS CRUCIAL

Additionally, banks must consistently monitor the rapidly

changing regulatory environment, which might impact

small business lending.


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5 REGULATORY ITEMS TO MONITOR CLOSELY

1. Small business data collection as outlined by

Dodd-Frank Act section 1071.


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5 REGULATORY ITEMS TO MONITOR CLOSELY (CONT.)

2. Potential expansion of regulatory oversight of

alternative/online lenders and the downstream

implications for bank/fintech partnerships

and alliances.


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3. Enhanced scrutiny of fair lending and loan pricing practices

within small business, particularly for clients that operate as sole proprietors.


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4. Increased focus on:• Data accuracy

and consistency.• The types of data

being used during credit evaluation.

• Examination of credit reporting practices (consumer and business).


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5. Execution of consistent practices that lead to transparency throughout

the entire lending process, while maintaining strong risk discipline.


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The Credit Risk Council supports professionals who are responsible for establishing, maintaining, or carrying out credit risk management policies.

The council focuses on funded and off-balance-sheet risk management, including capital markets activity, and other forms of credit intermediation and risk mitigation.

About RMA’s Credit Risk Council


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small business lending outlook

Economy & Finance