Seven Key Principles for Effective Loan Portfolio and Risk Management

AgriFin (September 2014) | Contributed by Allyn Lamb, Retired CEO, AgChoice Farm Credit. For an in-depth discussion of these principles, listen to a webinar presentation by Allyn here. Download PDF here. For additional information, please contact the author at:

Loan portfolio management strategies vary by institution and by country. However, there are a few basic principles that apply universally. Here are seven of them:

1. Understand two major principles of risk:

  • Stuff happens
  • You don’t know what you don’t know.

You have to anticipate events that could happen and be positioned for unanticipated events.

2. Loan portfolio management is only one aspect of overall risk management

Look at LPM from the perspective of Enterprise Risk Management. Look at all of the risks your organization faces. How you manage your loan portfolio depends on your level of capital, amount of expected earnings, economic outlook, and a variety of other factors.

3. Know your organization’s risk position and appetite for risk

Prepare a survey to identify major risks. Establish ratings for each identified risk along three parameters:

  • Significance of risk. How much damage will be caused if the event happens?
  • Likelihood of risk event occurring. What are the chances that this event will happen?
  • Ability to manage the risk. Is the risk something that can be easily anticipated and managed?

Have your directors and managers participate in the survey and discuss the results with everyone.

4. Build risk management principles into your strategic plan

Your strategic plan should be the foundation for policies, goals, targets, and underwriting standards. Run stress testing scenarios to better understand what happens when things don’t go according to plan.

5. Monitor key performance indicators and share the results

Sunlight is the best disinfectant. Make sure everyone in the organization can see how the organization is doing and progressing. Develop an easy to understand dashboard to highlight what is working well and what needs improving.

6. Have a rigorous, independent review process

Have an internal auditor/credit reviewer who reports directly to the board and senior management. You want to find problems early while they can still be fixed. Never fool yourself. Also have an external auditor/credit reviewer to check on the internal processes.

7. None of the actions or strategies above make any difference unless there is a culture of trust and respect

Make sure you have a culture of trust and respect. Employ people who are competent, well-trained, and have demonstrated a set of values that include trust and respect. Good people make loan portfolio and risk management work. It is the foundation upon which everything else rests.

Loan portfolio and risk management is not just about avoiding risk. It is also about balancing risk with reward, making sure you are seizing opportunities in your marketplace and serving your community well. So, go for the opportunities while balancing your risk management strategy with these seven points. It can help make your organization even more successful.

Does your organization apply any of these risk management principles? Download the PDF version and share these principles at your next staff meeting or training session. Listen to an in-depth discussion of these principles here. 

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