When liquidity is tight, banks and credit unions can struggle to maintain consistent funding of their indirect lending loan portfolios. Indirect lending has proven to be a powerful way to maintain profitability and increase net interest margin.
For instance, the top 5% of banks and credit unions use indirect loans and unsecured personal loans to achieve an average of 6.4% net interest margin. This is 3% higher than industry averages of 3.4%. Today, these top performers are experiencing the same liquidity constraints as the rest of the industry which poses a risk of losing their relationships for indirect flow. Fortunately, there are several steps that can be taken to ensure consistent loan flow is maintained during times of tighter liquidity.
To start, here’s a quick view of the five main ways to maintain an indirect lending loan flow when liquidity is tight:
- Borrow from Federal Home Loan Bank
- Raise deposit rates
- Increase your business partnerships to build out your referral network
- Securitize a portion of your portfolio and sell of underperforming assets to increase liquidity
- Invest in technology to set up a real-time loan syndication program to maintain flow
The first option is to borrow from the Federal Home Loan Bank. Second, raise deposit rates to encourage consumers to provide more cash on hand. to Even in times of tight liquidity, making it more enticing for customers to bank with them, by offering appealing rates, will help community financial institutions increase the total amount of funding available.
FIs can also look for ways to increase their business partnerships to build out their referral network. Top performers in the industry succeed in part by creating strategic and successful partnerships with fintech companies or third party originators. This allows them to use each other’s customer bases to refer clients, increasing their chances of finding new and qualified customers.
Another option is for banks or credit unions to securitize a portion of their portfolio and sell off assets to increase liquidity. 4 Credit Unions have done securitizations in 2023 for this explicit purpose.
The next step is to invest in technology. Companies that make the effort to become more efficient and employ the latest digital strategies will stay ahead of their competitors in any environment. Investing in technology can also make their processes and operations more efficient, and get them closer to their goal of increasing or maintaining their flow levels. The goal should be to get to a 100% digital autonomous process that removes almost all human interaction and maximize efficiency by setting up a real-time loan syndication program helps to keep a steady flow of new loans entering the system. A real-time loan syndication program helps banks and credit unions match liquidity from other banks and credit unions prior to making a lending decision.
By using real-time syndication as part of existing flow programs a bank or a credit union can maintain their funding commitments without providing all of the funding. This practice also has the added benefit of reducing interest rate risk as well on all newly generated loans.
Banks and credit unions have plenty of options available to maintain their indirect loan flow when liquidity is tight. By utilizing Federal Home Loan Bank’s services, increasing referral partnerships, securitizing a portion of their portfolio, and investing in technology to set up a real-time loan syndication program, community financial institutions can ensure their loan portfolio grows steadily and maintain their profitability over time. Though these can be challenging circumstances, with the correct steps, the outcome can be extremely beneficial to banks or credit unions that take the effort to invest the necessary resources.