In March, the Credit Managers' Index (CMI) declined marginally, although the shift proved insignificant enough that there were no definitive reasons for concern or elation either way. Still, the fact that the number of credit applications climbed somewhat should bode well for businesses considering seeking their own lines of credit.
"Businesses are starting to more aggressively pursue credit," NACM economist Chris Kuehl said. "However, serious issues remain in balancing the desire for more credit and creditworthiness. [March is] telling roughly the same story as other economic indicators of late…Nothing is suggesting a return to recession, but neither is there a sure sign of an imminent breakout in the manufacturing or service sectors."
How does leveraged lending fit in?
Among the businesses seeking credit are those that already have debt problems. The practice of providing "leveraged loans" is one that banks have engaged in for years, and especially leading up to the financial crisis of the late 2000s. Until February of this year, the record for leveraged loans was $78 billion, set in February 2007. Leverage loans have experienced a resurgence since then, as lenders appear willing again to take on more risk.
The practice has become so common that even the Federal Reserve has taken notice, issuing new guidance on leveraged loans for the first time since 2001. Among its suggested best practices, the Fed recommends instituting more stringent underwriting standards and establishing a better risk management framework.
To insulate themselves from high-risk lending practices or from loan originations that are not profitable, strong risk management tools need to be put in place. These loans to unqualified borrowers should never be made.