It’s stunning to meet with the world’s most profitable and best-managed banks and see the same problem over and over again.  The always troubled relationship between Credit and front-line RMs has deteriorated to new dysfunctional depths, with devastating impacts on RM productivity. Here’s the story that emerges after a little probing.

Most of today’s RM’s grew up in an easy credit environment and few were actually around in the last real recession in 1990. Those RM’s that were successful and stayed in the business learned what a good deal looks like, developing a sense for which  loans were likely to get through the credit process and make their effort worthwhile. They were and are productive because they figured out how to invest their time in pursuing credit opportunities that had a high probability of approval.

And then the rules got turned upside down and–even  in those banks that have become some of the best performers in the crisis–we hear the same stories about how RMs don’t know what a good deal looks like in this new environment, chasing deals that they think make sense based on their experience but the rejection rates keep getting higher and higher. 

I’ve asked this question many times in recent meetings with Credit or Sales – and there usually is an uncomfortable silence and a shocked recognition that they actually don’t know.

Clearly, there are very good reasons why more deals get rejected in a time like this, but the root of the problem is poor communication.  Somehow the complexity and nuance of the opportunities Credit is willing to approve are not getting through clearly to RMs, leading RMs to chase the wrong ones, miss the good ones and end up bitter and frustrated with  the credit function , their jobs, and the world in general.

Additionally, the safety valves to diffuse RMs’ frustration or to help them figure out with more precision what they should be looking for are shaky.  There are few opportunities for Credit and Sales to interact and break through the hardening stereotypes; few opportunities for Credit to provide detailed explanations of what they are looking for in the new context.

It’s a conflict of cultures- Credit is an analytical function, RM’s are fundamentally salespeople. The needs of reconciling the skyrocketing complexity and communication needs in these unusual times require both sides to step out of areas of comfort.

This is not an easy thing to solve but here are three proposals to think about that seem to help members take some steps to resolve this dilemma, assuming Credit has thought about what deals they are willing to approve and what risk profile makes sense for their institution (which may not be the case in some organizations):

1) Create opportunities for Credit and the Frontline to interact. Pressure and crisis drive people into isolation and panic. Use any possible opportunity to get Credit and the Frontline face time with one another. Some of our most progressive members are bringing Credit and the Frontline together on a quarterly basis to  review business plans and enable Credit to provide their viewpoint on what will make theses objectives achievable.

2) Simplify credit policies.  One credit officer told me recently they had 1500 credit policies—an impossible to keep track of while doing an RM job (or any job for that matter).  Communicate the core credit philosophy in not more than ten principles that an average RM can absorb and integrate into their thinking. At least it will make them feel that there is some logic to what is happening

3) Review credit metrics on a quarterly basis.  Know what percentages of deals are getting rejected; know how these metrics vary by RM, by region and team, and how they have evolved in the post-crisis world.

We welcome any of your thoughts and comments as we dig deeper into this issue.

This latest quarter, despite record levels of free reserves saw lending continue to shrink. Hard to believe this internal communication challenge hasn’t made some contribution to this outcome.