Loan policies have come a long way since the go-go 1980s, when "quit your moanin' - get out loanin'" was the order of the day for lending officers.
For the 1990s, the theme is "back to basics." Gone are the days when a bank officer could court the borrower at a nightclub table, drawing up the loan on a napkin while the customer guzzled champagne out of his boot.
These days, we all recognize the role of noncredit income and expense on the bottom line. In a volatile world, we no longer can afford to gamble on making profits by borrowing short and lending long - or borrowing long and lending short. But lending is still the key.
In the Revival Tent
If a bank earns 1% on assets, a credible goal for the '90s, one bad loan can gobble up the profit from 99 good ones. No wonder banks are reviving their commitment to solid credit analysis and loan officer training.
J. Howard Laeri, a top Citibank officer and president of the American Bankers Association in the '80s, used to say: "It takes four years to train a jet pilot - and we take five years to train a lending officer." Even if we haven't returned to that length and depth of training, all lenders these days are being forced to learn a lot more.
One of the most novel and valuable approaches to this necessity is the new program created by Robert Morris Associates. The 78-year-old group of bank loan and credit officers presents "Diagnostic Assessment of Lending Skills and Knowledge" in collaboration with the Educational Testing Service - the outfit that develops and administers the Scholastic Attitude Test.
The diagnostic assessment program gives the lending officer an examination that takes up to four hours to complete. After the Educational Testing Service scores the exam, it sends a confidential report to the credit officer's bank, detailing the degree of mastery and any areas that require additional training.
The Robert Morris program examines expertise in:
* Financial accounting.
* Statement analysis.
* Cash flow analysis.
* Loan structuring and pricing.
* Legal documentation.
* Environmental/lender-liability issues.
* Early detection of potential loan problems.
Included in these headings is an evaluation of skills on external issues such as the impact of foreign competition, new product demand, management efficiency, and even an analysis of personal financial statements and borrower's tax returns.
This diagnostic assessment program can provide meaningful information to the 14,000 member organizations of Robert Morris, whose ranks include 3,000 financial institutions.
But once the results are delivered, it is then up to the banks to upgrade their loan officers.
Trade associations and private groups sponsor many schools or short programs. And some bank up the ante by asking local college teachers to fill the knowledge gaps.
But so many college professors who specialize in corporate finance and accounting have become highly quantitative and theoretical. It makes me wonder how they can possibly help upgrade staff skills at a bank.
To solve this dilemma, I sought the help of Ivan Brick, a popular and highly qualified finance professor at Rutgers University. Mr. Brick conducts short-term training programs in finance for individual banks, as part of their credit training.
Mr. Brick assured me that he does not teach credit. He agrees that you have to be in the lending loop to know anything about lending.
He requires only ninth-grade algebra as a prerequisite for these programs, along with knowledge of basic terms and familiarity with financial newspapers.
Mr. Brick tries to help understand the value of a potential borrower's assets and any options available for structuring the credit. He teaches bank lenders to think the way their borrowers think.
International Business Machines Corp. had similar goals when it hired me to teach IBMers to think like bankers. Buck Rogers, my first IBM contact, explained: "Your school will be a success when every IBMer who enters a bank to sell equipment finds the banker trying to hire him away to work for the bank - and not in the data-processing area."
Mr. Brick's classes cover evaluation of company assets, including problems such as obsolescence, present-value analysis, interest rate forecasting, and cash-flow determination.
He explains how risk-modification routes - such as hedging foreign exchange risk, interest rate swaps, and the lease - make more choices available. "What if" examples show what happens to valuation assumptions when there are changes in interest rates, cash flows, final product demand, and other variables.
Mr. Brick explores zero-coupon bonds, defeasance, securitization, and swaps. Despite the quantitative nature of his examples, he stresses "feel" as the key to lending - far more important than solving problems. His most important lesson covers what is on the chief financial officer's mind.
Mr. Brick also has an answer to the liability suits that so often arise when a lender makes suggestions too forcefully: The banker can only advise; the customer is always right, even if the lender feels he isn't. When a lender really believes the customer is wrong, he doesn't have to go along with the loan.
In the 1980s, bankers felt that disagreeing with corporate officials mean they were out of date - for stupid. Since then, many bank lending officers have realized that they were right - and the CFO was using up bank money while living on Cloud Nine.
The Robert Morris Associates program, and courses of the type taught by Ivan Brick, can reinforce the lending officer's conviction when he says "no." They underscore a basic banking lesson we have forgotten for far too long: It's a lot easier to lend money than it is to lend it so that we get it repaid.