Bankers are considering AI's impact on a business when making loans

The Federal Reserve released its most recent quarterly opinion survey of senior loan officers across the country this week, asking about demand for loans and lending standards they’re setting.

For this survey, which covered the fourth quarter of last year, the central bank included questions aimed at getting a better understanding of how loan officers feel about lending to companies that are exposed to AI. Lenders said they were more likely to approve a loan if they thought AI could help the borrower, and less likely if they thought AI might threaten the business.

Robert James II, president and CEO of Carver Financial Corporation, said lenders will often bring up “the five C’s of lending” when asked how they decide whether to make a loan.

“Character, capacity to repay, capital — or financial resources — collateral, and conditions,” James said. “We’re looking at how the loan will be used and external factors like interest rates and trends in the industry.

He said the most important “C” on that list is character, as in a borrower’s credit history. But another big one is capacity — whether a borrower will be able to repay a loan, today and in the future.

“And that’s where the presence of AI, the threat of AI, or perhaps the opportunity presented by AI, starts to impact a business model,” James said.

Lenders are concerned about whether AI is going to disrupt a borrower’s entire industry.

David Schiff, senior managing director with FTI Consulting said a bank might think twice about lending to a company that provides services that AI can provide.

“There’s a threat where customers could substitute and/or put pricing pressure on them,” he said.

On the other hand, Schiff said AI could make some borrowers more attractive to lenders. A company that can use AI tools might be able to cut costs and pay off its debt more easily.

“Where there is a lot of underlying expense tied to easily repeatable, digitizable tasks, a lot of banks are looking at that as a cost-save opportunity,” he said.

Schiff said it can be challenging to figure out whether AI poses an opportunity or a threat.

“And it’s something the banks are having to look at and have judgement calls on, and at the end of the day, they’re making bets,” he said.

In some cases, banks are betting that their clients won’t be affected.

Brad Bolton, president and CEO of Community Spirit Bank in Red Bay, Alabama, said his customers include contractors, timber harvesters, farmers, and truckers.

“It’s a non-factor for my customers,” Bolton said. “I just don’t see that my customer — that’s hauling dog food or paper out of a paper mill, that’s a trucker — their lives are not going to be changed by AI.”

At least, he said, not within the next five or so years.