In the face of defaults: What sets resilient loan operations apart

Published on September 9, 2025 by Dulanya Bandara

Exploring the shift from reactive risk management to proactive loan servicing in today's evolving credit landscape

Credit defaults are not limited to stress cases of scenario analyses that only materialise in spreadsheets. They will test a bank’s operational resilience in the current volatile credit environment. Thus, a default tests the level of a bank’s systems integration and the response swiftness of the teams – primarily the loan operations (loan ops) team. The readiness of a loan ops team to navigate a crisis of this nature is what ultimately saves a bank from financial burden and reputational damage. To sum up, when a borrower stops paying, the spotlight often falls on the risk and legal teams; however, it is the loan ops team that quietly holds the whole process together, one clause, one system update and one deadline at a time.

A common misconception in non-banking groups is that defaults arise due to a missed payment. However, defaults do not happen overnight but are results of multiple events with unique operational consequences that usually demand instant actions and escalations.

• Monetary default – Generally identified as missed interest or principal payments

• Technical default – This pertains to breach of covenants, predominantly information and financial, that were set forth in the loan agreement

• Cross-default – When a borrower defaults on one facility and triggers cross-default clauses across other facilities

• Other types of default – These include insolvency, fraud, liquidation or regulatory breaches

With the events of defaults unveiled, let’s explore the ways a loan ops team could become operationally ready to manage a credit default.

1. Avoiding faulty defaults due to incorrect loan booking

Loan booking is one of the first steps in the loan ops process, requiring attention to detail. A robust process equipped with checklists, four-eye checks and quality checking are essential for loan facilities, which are governed by cumbersome loan agreements often spanning 100 or more pages. If this loan booking process is not foolproof, the banks could be exposed to faulty credit defaults, resulting in unnecessary impairment charges. Misclassified defaults may lead to severe consequences, including reputational damage and compromised client relationships. Therefore, the loan ops team must ensure that loan booking is done accurately, and if not, due corrections to the loan management system are carried out to avoid misclassified defaults.

2. Collateral maintenance

Due diligence in collateral maintenance is crucial to being operationally ready for a credit default. Collateral maintenance entails tasks related to maintaining the value of the underlying collateral, including necessary filings with state authorities, timely updates of insurance and correct assessments of value using valuation reports and borrowing base certificates. The fulfilment of these features will ensure the underlying collateral is adequate to safeguard the bank in the event of a credit default. The loan ops team is responsible for these tasks, and therefore, having the correct processes in place will ensure they are operationally ready for future credit defaults.

3. Restricting further disbursements and deactivating automated services

Most large reputed banks have integrated loan servicing platforms that include features such as scheduled renewals, interest rollovers and future drawdowns. Therefore, if credit defaults occur, the loan ops team should ensure to freeze the affected facilities in the system to prevent unintentional fund outflows that would increase bank exposure to the borrower. Also, if the loan agreements contain clauses to apply higher interest rates following defaults, those types of in-life loan servicing tasks fall within the purview of the loan ops team.

4. Implementing post-default conditions outlined in the loan agreement

Typically, loan agreements outline the conditions that are to be applied if a default is triggered. The loan ops team will play a lead role at this juncture as well. The team will be governed by the underlying loan agreements that have been signed and will need counsel from the bank’s legal team and ensure correct steps are taken if an event of a default has taken place. The communication trail with the borrower will be valuable evidence for probable future disputes. Therefore, the event of default needs to be clearly communicated to the borrower, giving them the opportunity to remedy the situation. These matters need to be followed up diligently until the default is remedied. Failure to remedy will require the loan ops team to escalate the issue to the relevant teams for further action.

5. Supporting the next course of action: Restructure or write-off and reporting requirements

The next steps would predominantly revolve around the borrower and the deal team negotiating a workaround to recover the payments. It is the responsibility of the loan ops team to sustain the operational precision of the chosen course of action, which may include amending repayment schedules/revising pricing and managing complex signoffs for syndicated loans or partial write-offs where applicable. Correctly marking the restructure number count in the loan management system is critical in classifying the loan under the various stages as per IFRS reporting. Defaults will naturally be internally and externally scrutinised and therefore will demand strict and accurate reporting. The loan ops team should ensure data quality by outlining every step of the process with sufficient evidence to avoid compliance penalties. The team will be required to work closely with the finance team as well to ensure correct impairment charges are applied, if required.

Conclusion

It is critical to evaluate how ready a loan ops team is operationally to promptly initiate the subsequent steps while being the single point of contact for multiple stakeholders when navigating a credit default. For, in lending, the real test is not when money starts coming in but rather when it stops.

How can Acuity help?

In our extensive involvement in supporting global banks over the years, we have first-hand experience on how operational teams react at an organisational level and how best outcomes are achieved under a default situation. We are a team of professionals with domain expertise in loan ops, trusted by prominent global financial institutions. Our strength is in streamlining complex processes with care that makes us well-equipped to step in when it matters the most. Whether it’s managing defaults or providing you with exceptional loan ops services, we bring “operational readiness” right when you need it most.

Sources

• Debt Default - Definition, How it Affects You, Types,

• What Happens in a Private Credit Loan Default?

• Navigating the Loan Default Process for Businesses: How to Handle It | Forvis Mazars

• What do Banks do When Clients Default on Loans?

• A Borrower Defaulted: Now What? Your Critical First Steps | Shipman & Goodwin LLP - JDSupra

• The Ultimate Guide to Loan Servicing for Banks - Loan Management Software by Fundingo

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