A recent study from the San Francisco Federal Reserve Banknotes banks’ reluctance to lend to consumers with subprime creditis creating headwinds for future economic growth. The reportsuggests banks’ credit decisioning, and not just consumers’reluctance to borrow, is hampering consumer spending.
This is clearly a conundrum for all involved. Many consumers havedinged credit scores as a result of five years of economic malaise,and financial institutions can ill afford to offer new oradditional credit to individuals who may not be able to pay itback.
Recently, however, financial results for many financialinstitutions have been promising, and are beginning to show markedimprovements in revenues and profitability. These results hint atcontinued slow but steady improvement in both microeconomic andmacroeconomic conditions.
With interest rates at historically low levels, financialinstitutions need to find a way to say “yes” more often fordeserving consumers, both to spur economic growth as well as togrow their own bottom lines.
There are ways to balance the needs of consumers and financialinstitutions. There continues to be improvements in the methodsavailable to banks to better identify and categorize risk. Thesesolutions typically involve using powerful analytics tools andsophisticated software models to better understand the underlyingrisk and potential return for pending credit decisions.
By using such solutions, institutions can have a greaterunderstanding of customers’ true risk profiles, which can increasetheir confidence in their credit scoring models and subsequentlending decisions. This can ultimately increase the performance oftheir loan portfolios and boost overall profitability.