A UPS hub in Pennsylvania has found the answer to managing overwhelming amounts of online order returns: robots. The warehouse launched 150 Geek+ robots to zoom around the warehouse, sorting returns to be sent back to retailers. Within the first 30 days, Happy Returns saw a 35% reduction in shipping time back to retailers, a 65% increase in accuracy, and a 50% increase in processing efficiency. What used to be a chaotic warehouse serving over 1K retail brands is now far more streamlined and allows human employees to focus on high-value tasks.Just as technology has optimized warehouse operations, making them more efficient and precise, community financial institutions (CFIs) can also leverage automation and data-driven tools to enhance loan monitoring. Consider this: According to the FDIC’s 2024 Q3 review of FDIC-insured community financial institutions (CFIs), the industry’s net charge-off rate was 16bp higher than 2023 Q3, and 19bp above the pre-pandemic average. This rising net charge-off rate suggests that CFIs may want to pay more attention to loan portfolio performance, working to pinpoint difficulties. The Reality of Loan MonitoringEffective loan monitoring goes beyond just checking boxes — it requires continuous oversight, proactive intervention, and strategic decision-making to mitigate risk and ensure loan performance. CFIs should adopt a structured, data-driven approach to identify potential red flags early and take corrective action before problems escalate. This includes:
- Assessing borrower credit health. A loan that looks healthy today may not stay that way tomorrow. CFIs should regularly review financial statements, creditworthiness, and external risk factors that may impact a borrower's ability to repay. Changes in industry conditions, market downturns, or shifts in a borrower's financial position can all signal increased risk.
- Tracking and enforcing covenants. Loan covenants are designed to protect CFIs from excessive borrower risk, but without structured monitoring, they can be difficult to track and enforce. Institutions must ensure that borrowers adhere to financial ratios, reporting requirements, and operational commitments, taking action when early warning signs appear.
- Staying ahead of regulatory expectations. CFIs must be able to demonstrate strong risk management practices to regulators. This means more than just reacting to problem loans; it involves implementing early intervention strategies, documenting oversight efforts, and maintaining clear audit trails to prove compliance.
Why Loan Monitoring Isn’t Always SimpleEven under ideal conditions, loan monitoring is a complex and resource-intensive process — but in reality, financial institutions rarely operate under perfect conditions. Limited staff, growing regulatory expectations, and evolving borrower risks all contribute to oversight challenges. Some of the most common issues include:
- Disorganized covenant tracking. Without an automated system, CFIs can struggle to track key deadlines and compliance requirements, increasing the risk of covenant breaches going unnoticed. Relying on manual spreadsheets, scattered documents, or paper files can lead to inefficiencies, missed obligations, and a lack of real-time visibility into borrower performance.
- Not prioritizing periodic reviews. Loans that appear to be performing well may still carry hidden risks, but without structured, periodic reviews, CFIs might miss early warning signs. These reviews often get deprioritized, especially when they require as much time and effort as originating a new loan — but skipping them can lead to preventable losses and regulatory scrutiny.
How Technology Transforms Loan MonitoringWith the right technology, CFIs can monitor loans more effectively, reducing risk and improving decision-making at both the individual loan and portfolio level. Here are some factors to consider:
- Real-time data integration. This type of technology solution relies on pulling information from internal banking systems, credit bureaus, and market data providers to ensure decisions are based on the most up-to-date borrower and market conditions.
- Predictive analytics and AI. These technologies can look at both historical and current loan data and identify trends that may predict future loan performance. While not infallible, they can help you spot early warning signs of poor loan performance so you can address concerns with the borrower to potentially prevent delinquency or a default.
- Automated alerts and reporting. You might consider employing a system or platform that can track covenant deadlines, borrower obligations, and regulatory metrics, ensuring proactive risk management. In some cases, this technology can alert you to emerging risks within a sector.
With rising charge-off rates and increasing regulatory expectations, traditional oversight methods alone may no longer be enough. By leveraging technology, CFIs can take a proactive, data-driven approach, ensuring stronger loan performance, regulatory compliance, and long-term financial stability in an unpredictable market.
