New ways for a holistic assessment of credit

Credit assessment has always been complex for both banks and their customers: on the one hand, for years loans have been granted based on mainly mortgage guarantees, on the other, companies often felt they were being examined and were not prepared for the requests made by their banks. EBA (the European Banking Authority) has intervened on the complexity of credit assessment and, demonstrating the limits of that approach, has published new guidelines to direct the assessment process.

Post pandemic credit assessment

Now more than ever, following the pandemic emergency, banks have found themselves having to travel assessment paths which we could call “holistic’: in an increasingly more interconnected, global market the ability to do business is a daily challenge that every company is called on to handle. And even more so, banks are called on to assess multiple aspects before granting a loan:

market position;
The more or less high concentration on customer and suppliers and their standing;
The consistency of production structures;
The capacity and geographical positioning of commercial networks;
The quality of Management, result or know-how and experience;
The digitisation path.

Not least, the capacity of the company and entrepreneur to react fast to market changes that are increasingly more sudden.

Banks are therefore obliged to assess the Governance of a company as a whole: not just the entrepreneurial capacity and strategic vision of whoever manages it, but also, and above all, the level of reactivity to market changes, to the sudden changes in the production and distribution chains, and the sustainability of choices made in a multi-year time period assessing the repayment capacity of a company even in potentially adverse conditions through a sensitivity analysis.

The Bank as a partner

It is not by chance that the credit assessment guidelines have moved from a static assessment of guarantees to a dynamic one that almost always starts with a Business Plan, the first winning card of a company introducing itself to a bank; to then concentrate on the company’s ability to produce positive cash flows able to remunerate all stakeholders including the banks and the loans they allocate.

Today, more than ever before, banks are required to ‘understand the company’: a complex organism that acts in an increasingly more global market, that has to deal with many challenges like those linked to the speeding up digitisation imposed by the pandemic or the sustainability guidelines drawn up at European level: today’s enterprise is increasingly called on to have an effect on society through its actions.

The role of a bank in this process can and must not be company governance (even if pledges on stock or shares are required), but represents a careful (at times patient) “travelling companion” able to understand the company’s growth path. In that way it can then identify the best financial support, also offering the best product in timing terms (short or medium-long term even with significant grace periods, if needed) with a specialist and tailor-made approach to better adapt loans to company needs based on the sector belonged to.

From this point of view, transparency and the ability to communicate of the company and the entrepreneur become fundamental for enabling the credit analysts to understand and knowingly choose to take the risk. This is especially valid if the loans requested by the company are for production changes, opening new market segments, delocalization, change in the business-mix, often courageous choices by those with a strategic vision (who imagined ‘a future’), but which must remain consistent with the company’s distinctive know-how, its story and recognition by the market.

The choice to finance a company over the medium-long term period is ultimately based on the trust placed in whoever manages the company to decidedly and resiliently pursue sustainable growth; even when faced with new production and commercial challenges or important organisational changes.

In a nutshell, what analysts require each time they relate with an entrepreneurial structure is “show me the journey and your leadership skill (even when the wind is against you).” When navigating on the high seas, you, in fact, need an expert, capable captain.

by
Tiziana Campanella, Head of Operations Assessment

At the beginning of my career I worked for about 10 years in the Financial Institutions division of KPMG, specializing in M&A transactions both in Italy and cross-border. I was Head of Business Development for Real Estate and Diversified Companies of UnipolSai Assicurazioni S.p.A. and Head of Operations, M&A and Real Estate in UnipolRec. I held the position of Head of Credit Machine – SME Division in illimity with responsibility for credit analysis for financing dossiers for all business lines of the Small & Medium Enterprises Division. Since spring 2021 I have headed the office that deals with credit evaluation in Banca Ifis.

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