Every business has functions that are less efficient than desirable, driving up costs and resulting in missed opportunities. For the banking industry, the loan processing methodology stands out as a primary example.
One path to improvement has been in applying Lean Six Sigma to the process. Using Lean as a basis for re-engineering loan processing enables banks to move from being at full capacity to being at optimal productivity, which is by far the more profitable position. Some experts, in fact, say banks report these efforts have rendered savings of between 20% and 40%, and sometimes higher.
The saying “If it is predictable, it’s preventable,” is relevant to the business of applying a Lean lens to the problem: Study the process, identify delays and figure out fixes to drive improved productivity.
It takes detailed tracking on how much time and effort each takes and why. Over a period of time, two key signals will indicate improvement is needed. One is the consistency with which loans are processed – how long the process takes for each application. The other is the excuses for inconsistencies: It was a busy month. Not enough people. Vacations slowed things down. Borrowers were slow with documentation.
The likely problem areas that will be revealed, along with their solutions and potential savingsare discussed below:
- Training/personnel: Disruptions to the process that cause backlogs and bottlenecks occur when not enough people are trained (or cross-trained) and available to step in and relieve the pressure. Cross-trained teams of employees can be backed up through outsourcing when workflow is particularly heavy. Alternatively, a process can be initiated where loans in progress are rotated among other bank operations or branches. Estimates are that such “load balancing” processes can create 15% gains in productivity.
- The process itself: One of the biggest issues with loan processing is the practice of treating all loans the same. Better aligning the effort with the risk inherent to the loan is a key solution. By not treating all loans the same, or according to size versus risk, other common process issues will be cured. Streamlining processes and correlating risk and effort can yield as much as 25% savings in processing time and costs.
- Collecting, analyzing, presenting loan application data: It’s often a case of “TMI”: Information is collected on the borrower’s financial position (ex: if she’s married or how her relationship with the bank evolved) that has no relevance to the lending decision. Narratives about the borrower’s financial position just repeat the numerical information, rather than explaining the numbers. Critical data points that are relevant to an accurate credit decision are often missing or buried.Standardizing formats and making them flexible enough to reflect the risk aligns the information, its detail and analysis, with the probability of default. Moreover, each piece of information will lead to a decision. Restructuring this part of the process can save as much as 35% in processing time.
Lean Six Sigma isn’t for every financial institution, but its applications for functions like loan production can dramatically improve productivity ratios. Any bank that wants to improve its performance will be well-served to adopt a Lean lens to help simplify and prioritize important operations.
* numbers are based on reports by 40 community banks that have used Lean/Six to gain productivity.
