What is Centralized Lending?
Centralized lending involves borrowing and lending funds through a central authority, typically a bank or financial institution. In this model, borrowers apply for loans directly with the central entity, which assesses creditworthiness, sets interest rates, and manages the lending process.
This traditional approach provides oversight and control but relies on a central intermediary. Centralized lending contrasts with decentralized models, like blockchain-based platforms, where peer-to-peer lending occurs without intermediaries.
Benefits of Centralized Lending
1. Increased Efficiency
Adopting a centralized lending process can dramatically increase efficiency and productivity in the lending department. It allows employees to specialize in each of their areas of the complete lending process and become extremely knowledgeable at their portion of the work. Think of an assembly line. You don't expect one machine or employee to complete the entire process of constructing a product. It's more efficient to have each employee or machine specialize in one or two specific steps.
Learn more about increasing efficiency through centralized lending here.
2. Maximized Employee Skill Sets
Allowing each employee to master their portion of the lending process alleviates many employees from one of the most feared steps... selling. Few are cut out for and properly trained to be effective salespeople. It's important that credit unions identify or train who their best sales individuals are and place them where they can be successful.
3. Decreased Training Expenses
Focusing employees on only one skill set also leads to decreased training costs for the credit union. Employees will not need to be highly trained on the steps of the lending process they don't perform, which decrease the number of training hours they’ll need to complete and drives down training expenses. This makes it easier to schedule training sessions and allows trainers to provide more one-on-one help as needed.
4. Increased Lending Profits
Less time spent on the lending process and increased efficiency means that profits should increase. Cutting the cost it takes to manage and produce a loan allows your credit union to increase your bottom line. This increases the overall value of a credit unions lending process because loans are not only more cost-effective, they’re also funded faster and with fewer errors. Many organizations are looking to cut expenses, but oftentimes there are drawbacks to doing so. With centralized lending, quality is not compromised for efficiency and savings.
5. Diminished Employee Errors
Another benefit of focusing employees on one skill is that the likelihood of errors decreases. As experts in their area, they will be able to do their job more easily, effectively, and at lower risk of making mistakes. In lending especially, errors can be extremely costly. High loan losses are devastating to any credit union and also cause disruptions for the member during the lending process.
6. Streamlined Process
The greatest benefit of centralized lending is being able to streamline the process. Having one senior manager at the helm of the lending department sharpens their control over the process. It allows the senior manager to oversee the day-to-day operations better and keep a close relationship with both employees and members. In centralized lending, focused employee roles - in conjunction with clearly defined steps in the lending process - leads to a repeatable and dependable lending solution.
7. Increased Data Analysis
Centralized lending systems enable credit unions to gather a wide range of data related to lending activities. This includes information about borrower demographics, credit histories, loan types, repayment patterns, and more. The centralized nature of the system ensures that data from various sources is consolidated in one accessible location.
8. Diversified Portfolio
Centralized lending enables credit unions to diversify their loan portfolio, offering a variety of products with different terms and rates. This strategic diversification helps mitigate risk and caters to the diverse financial needs of members, enhancing the credit union's ability to serve a broader range of member demographics effectively.
9. Enhanced Member Experience
An enhanced member experience is cultivated through centralized lending, where swift loan approvals, uniform processes, and efficient customer service converge. This streamlined approach not only reduces wait times but also ensures a seamless lending process. Members reap the benefits of expedited access to financial products, fostering satisfaction and trust. Ultimately, centralized lending plays a pivotal role in optimizing the overall experience for credit union members by prioritizing efficiency and responsiveness in their interactions with lending services.
10. Managed Risks
In the context of risk management, centralized lending empowers your credit unions to establish formidable strategies. By consolidating the evaluation of borrower creditworthiness, credit unions can make well-informed lending decisions. This centralized approach not only enhances the accuracy of risk assessments but also facilitates the implementation of proactive measures to mitigate the risk of loan defaults. Overall, centralized lending serves as a cornerstone for credit unions to strengthen their risk management practices, ensuring a more secure and sustainable lending portfolio.
Get All the Benefits of Centralized Lending With FLEX
While there are many lending processes which are able to serve the needs of a credit union, centralized lending provides unmatched capabilities. Credit unions should be able to easily adopt centralized lending in their Loan Origination System (LOS). Assigning a new loan officer needs to be simple and notifications that you have been assigned a loan or application should be natively built in. Additionally, security or permission parameters will help appease auditors who question the centralized lending process and want to verify that one employee cant approve and fund a loan. The bottom line is that technology should enhance, not hinder your adoption of a centralized lending process.
