Improving a Commercial Lending Process − A BPM Teaching Case Study

Preface 

This teaching case presents a commercial lending process of a financial institution called the Bank of Golden Merchants (BGM)1. This is sourced and adapted from a real case study with a local Australian financial institution. We firstly present a background on BGM then each phase in its commercial loan process is discussed at a relevant level of detail. Finally, further details are provided on what you need to address as part of your assessment for the unit.

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Background 

The Bank of Golden Merchants (BGM) is a leading provider of both personal and business banking services with more than 200 branches across the nation, and prides itself on achieving some of the highest customer satisfaction rankings in the Industry. With a rapid growing base of almost a million customers nation-wide, BGM faces some unique challenges with maintaining agility of loan services and competing with the other major players in the banking sector. Recently, the Commercial Lending Process (CLP), a core business process in BGM, has been identified as a prime candidate for analysis and improvement, due to instances of poor information quality, high process costs and a degree of work duplication, all of which can lead to Customers taking their business elsewhere.  The processing of commercial loans at BGM is completed by its Business Banking Solutions (BBS) team or Commercial Lenders within the various Business Banking portfolios or branches. The primary role of the BBS team is to support the branches and Relationship Managers (those not especially skilled in commercial lending) with their commercial lending applications (either from loan application to settlement or post application approval). A number of concerns have been raised by Senior BGM Management regarding the efficiency, timeliness and effectiveness of this process. In addition, the manual, iterative and paperbased nature of this process has been questioned with numerous handoffs to external Contractors and minimal checks and balances on data quality.  Kevin Johnson, a Process Improvement Manager of the Business Banking Division in BGM, is designated to review and investigate the current situation of the CLP, and to report to the General Manager of the Business Banking Division a summary of findings and suggestions to improve the process performance during their monthly meetings. Being aware of the lack of skilled BPM resources in BGM, Kevin contacts your Consulting Team to assist with this process improvement initiative.

1 All names used in this case study are fictitious.

Overview of the Current Situation

The Commercial Lending Process has been designed to facilitate the provision of finance to small, medium and large size business customers across the nation. This process is well established, involves numerous internal and external stakeholders and is long overdue for review. At a very high level, the process commences with a loan application (through various channels), followed by an internal assessment of this submission. If the loan application is approved, the supporting documentation is forwarded to an external ‘Loan Centre’ for processing prior to loan settlement. There are numerous stakeholders involved in the process as well as strict legal and regulatory requirements that must be met. An initial commercial loan enquiry can be lodged either in person at a Bank Branch, via the Bank website, through a BGM Relationship Manager, or via a Broker.  Once received, an assessment of the loan request is conducted either by BBS, Business Banking, or the branch. This is to determine the appropriateness of the loan for the customers’ requirements and their ability to repay any finance offered. The approval to proceed with the loan is granted by the Credit Department. Upon approval, all preliminary documentation is then delivered to the Loan Centre. Once the loan documents have been created and processed, they are returned to BGM for finalisation and settlement of the loan agreement. An initial process efficiency exercise has been conducted by Kevin to capture metrics around the amount of time spent on activities, particularly non/low-value adding activities. The data is being used to determine if these activities are aligned to our business strategy and explore alternative options to reduce the amount of time spent on them. Some metrics captured as part of this ‘time and motion’ study across all Business Banking activities show that the application and assessment phases of the CLP  take up 27% of Business Banking’s time and 7% is spent on documentation and loan settlement processing. Overall, lending activities account for approximately 60% of their time. This ultimately leads to an average loan processing period (excluding Settlement) of around 13 days, which in today’s highly competitive financial services sector could certainly be improved. While there are strict legal and regulatory policies in place for this process, there is also a demand for a high level of information quality and completeness on each loan application. Due to the changing nature of the financial services regulatory environment, adherence to policy and procedure is critical to minimise BGM’s financial risk in granting a commercial loan. Unfortunately this may also impact upon the timeliness of loan settlement.  The following sections discuss the Bank activities in each of the main phases of the CLP.

Phase 1: Customer Application

The CLP commences with a Business Customer lodging an initial commercial loan request with BGM. Hundreds of commercial loan requests are received each week. Among these, approximately 10% are submitted online, 30% submitted in person at a BGM Branch, and 60% submitted via the Bank Relationship Managers. Where the financial value of the proposed commercial loan is less than $5 million it will be completed by a Business Banker, or a branch depending on the loan amount and authority level of the branch. Any loan requests over this value are completed by Business Banking or Corporate Banking due to the complexity of the deal.

On completion of an interview and a careful customer needs analysis, the Lender completing the deal determines the correct loan product that will service the customer’s requirements. This can prove difficult as choice of loan products available is ever-changing and not all staff may be aware of updated policy and product information. Often this is also compounded by procedural ambiguity and difficulty with navigating the BGM’s Intranet site.  Once the complete customer information is received, the prospective loan request can be validated and a preliminary customer file can be established.  Due to the typically complex nature of commercial loans over $5 million, most requests will come in to Corporate Banking directly from a Relationship Manager (ten staff nation-wide with an average remuneration of $120,0002). For a commercial loan submission to progress, there are a number of highly manual steps and data collection activities as specified in BGM’s ‘Commercial Submission Checklist’, which must be checked off to the satisfaction of the Bank. Even though only 20% of all commercial loans fall into this category, the complexity of detail and level of risk management involved requires a much more personalised approach to customer engagement.  When the above steps have been completed, an official loan application document is created (by the Lender) and forwarded to the Customer and the Customer’s Guarantor (required by 90% of all applications). Once this loan document has been successfully completed by the Customer, and returned by mail or in person to the Lender, the application is validated and the customer file is formalised. The Customer will be contacted by mail or telephone if additional information is required.  Completing this phase in a timely and accurate manner is crucial for the next step in this process. It is not uncommon for loan requests to be continuously delayed due to a lack of Customer information which must be supplied before the application can proceed further. Ideally most loan requests (up to 80%) handled by the BBS team can be moved onto the Assessment phase within a few days. However, depending upon the dollar value and complexity of the commercial loan structure, some applications may take up to three months to complete the paperwork before they can move to the Assessment phase. Managing the different loan values, financial structure complexity and customer expectations during this phase are key concerns of BGM Senior Management.

 Phase 2: Application Assessment (pre-approval)

The purpose of the Assessment phase is to ensure that the potential Customer meets all of the requirements for the banking product being offered. In this phase, the proposed loan application is reviewed by the Risk Assessment Staff (five positions in the Risk Assessment Team) to ensure that the product offered is both suitable for the Customers requirements and also makes commercial sense from the Bank’s perspective according to BGM’s ‘Commercial Lending Compliance Checklist’. If this assessment determines an unacceptable financial risk, the Lender will advise the Customer that the loan application will not proceed. Up to 8% of loan applications are rejected at this stage of the process. To determine any loan risk, lenders (remuneration $85,000) conduct credit checks and create a risk assessment profile which is added to the customer file. Some of the issues that constitute an    unacceptable risk include a lack of customer equity in existing property, insufficient financial projections for the business being purchased or a poor credit history. Once commercial loan suitability is confirmed, Customer Reference reports and Company and Title searches are arranged by the Lender through a credit reporting agency called RCS Data Intelligence (or RCS for short). This task can take between one day and several weeks depending upon the complexity of the loan arrangement and dollar value sought. The Lender and the Risk Assessment Team review these reports and if satisfactory, the valuation is completed.  When a valuation is finalised, the complete submission is reviewed with the Risk Assessment Team to provide advice to the Lender on whether the commercial loan application will be accepted. Once this decision has been made, the Customer is advised of the outcome by mail or through the Relationship Manager. If approved, the Customer then has the option of     accepting or rejecting the loan offer in writing (postal). If the Customer accepts the loan offer, the Lender prepares any legal documentation and collects the initial application fee, which is usually 0.75% of the approved loan. If the application is being completed by BBS, they will also create an online (in SharePoint) customer profile of all information captured to date.  This customer profile is then printed out into a hard-copy file ready for distribution to the Loan Centre.  Once these steps are complete, the file is posted in the common internal mail system. If this file is with the mail room by 3pm it will normally be at the Loan Centre the next business day. Due to the high volumes of internal postal mail, occasionally these files get “lost” and the entire process has to start again. To mitigate this risk, for Lenders based in the local CBD the customer file is sometimes physically walked two city blocks across town by the Lender to the Loan Centre for the finalisation of all loan documents (around 20% of the time). One recent development has been the introduction (December 2015) of a system known as the Commercial Loan Tracker (or Tracker for short), which automates the tracking of files as they move through the commercial loan process and provides a view of application status direct to the Lender. Commercial Lenders update customer information into the Tracker and the status is updated by the Risk Assessment Team as the file progresses through the first two phases of the CLP. A current limitation of this system though is that the Tracker does not follow customer files once they have been sent off to the Loan Centre for processing.   It is recognised that this Application Assessment phase may take up to seven days and is anecdotally known that some Customers may seek other sources of finance during this stage.

Phase 3: Application Documentation (post-approval)

The purpose of this phase is for the Loan Centre to collect all existing customer information as delivered by the Lender. Loan Centre will then generate the customer documents required for the loan to proceed and forward these files back to BGM via the internal mail. The Loan Centre completes their paperwork by manually re-entering the information received into their own internal system. While this is often an iterative process with feedback from BBS, there is minimal quality assurance on the accuracy of data supplied & the details are often taken at face value leading to rework and inaccuracies further delaying the process.

Once the Loan Centre completes the loan application documents, they are sent back to the lender via internal postal mail for re-checking. If posted prior to 3pm the documents will be delivered the next business day, if not then the following business day. For Lenders based in other cities or states delivery may be slower (up to five days).  Once the documents are verified as correct by the Lender, they are mailed to the Customer who is asked to sign off on the completed loan application. When this paperwork has been returned to BGM by the Customer, it will be checked again by the Lender for completeness and accuracy. Finally, once the documents are confirmed as correct (by the Lender), the loan application moves towards the final phase for settlement.

 Phase 4: Loan Settlement

The purpose of this phase of the CLP is for the booking of settlement by the Lender to engage a Solicitor or Conveyancer and ensure all of the legal requirements have been met. Once all finalised loan documentation has been correctly provided to the Lender by the Customer, the file is forwarded back to the Loan Centre (again either in person or via internal mail) to commence pre-settlement checks. At the same time, the Lender advises a Solicitor/Conveyancer of the pending loan settlement. The Loan Centre book in the official settlement date with the Solicitor/Conveyancer and complete any pre-settlement checks two days prior to this date. On the actual day of settlement, the Loan Centre prepares settlement instructions and attends the settlement meeting (this is actually outsourced to a 3rd party). If settlement is effected, the Loan Centre establishes a loan account and forwards a settlement notice to the Lender. Then Loan Centre prepares a customer letter, waits four days, and completes post settlement checks prior to mailing a settlement letter to both the Lender and the Customer. The Lender will then complete all their post settlement activities and finalise the lending file. The Loan Centre prepares loan stamping and registration details and lodges the mortgage with the Government Titles Office, which finalises their management of the commercial loan documents.

Question -Prepare Layered collaboration diagram for CLP  • Consider multiple levels of process models (if required), e.g.  o High-level overview process model  andLow-level detailed process models

Guidelines for modelling

This is the core of the report. It should include a description of the assumptions taken when modelling this scenario, and the required process models (value chain – worth 5% and collaboration diagram – worth 45% of the total mark). Research should be conducted, where required, to complement the description of the scenario, e.g. to organize the various services provided by BGM.  It is important not to trivialise BPMN and to include as many advanced concepts into the models as required. The model hierarchy must be well organised and where required it should be distinguished between specialisation and decomposition.  The models have to be correct in terms of both syntax and semantics, and they have to be of high pragmatic quality (i.e. they should be easy to read and as such complex constructs should be avoided when simpler alternatives exist). The experiences within the group have to be consolidated and should go beyond personal statements.

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