You are requested by the Head of Credit of Bank CCC to spot check existing loans of one of the bank branches and to compile a brief report about the extent to which products and the needs of customers were well matched. The following information was retrieved by you. Please provide a brief reason why you regard the match as suitable or not.
Ans. There are different types of loan products. Loan products should be matched with customer requirements so as to realize maximum worth of money and keep cost of money to minimum. Websites of major banks provide sufficient detail regarding various products. As per ANZ website as on April 11, 2012 (www.anz.com)
Type of loan Type of customer Need Matching good or not? Recommended form of finance Reason why matching is good/not good
Overdraft Small business To finance holiday of owner Not good Credit cards Overdrafts should only be used for financing some urgent and uncalled liquidity requirements in business and when there is not sufficient cash or bank balance with the firm.
Term loan supported by mortgage over property Large business To purchase a residential property in which the Manager of the production plant of the business will stay. Not good Working Capital Loan Housing arrangements for staff should be mentioned in their salary break up, salaries are working capital requirements and should not be financed by term loans.
Credit cards for sales staff of company Large (corporate) businesses To use as form of payment for regular dining, travelling etc. Not Good Working Capital Loan Credit cards should be used in personal accounts. Food and travel expenses incurred during official work, should be properly supported by bills before being sanctioned. Filling up of vouchers and attachment of bills by sales staff and submission to accounts dept. These are working capital requirements and can be funded by funds used for financing working capital
Financial lease Consumers To purchase a cabin cruiser boat Not Good Personal Loans Financial lease should be used to fund long term business capital requirements
Term loan with chattel over machines and letter of credit Farmers To import machinery that will be used in the manufacturing of products Good With such loans farmers will be able to procure the needed machinery for improving their farming productivity; they can repay the loan amount in Equated monthly instalments out of their monthly earnings. After certain type when the loan gets repayed, the farmer can get ownership of the machine, whereas in hire purchase alternative the farmer will have to pay a certain monthly rent and will not get ownership. Hence if the machinery is for long term permanent use, then this form of financing is appropriate.
6 month bank acceptance of $6 million with overdraft replacing it for another 6 months Large boat manufacturing company Funds needed for 6 months to pay for material to complete the manufacturing of a commercial boat that has to be built on order. Large contract payment will be used to repay loan. Not Good Business loan supported by adequate and appropriate Collateral Contract for items to be built on order should be accompanied by advance payments, if not in whole then in part, payable periodically, so as to cover the expenses incurred in manufacturing.If the manufacturer is working without any advance,then in this case he is incurring high risk and if he still wants to take the risk,then he must provide adequate and appropriate collateral for taking a business loan.
Revolving credit Medium size business in a growing marketing environment The business provides credit to its customers and requires additional working capital Good Revolving credit can be used for financing sort term liquidity requirements of firms including their working capital requirements. The debtors can repay their monthly instalments out of the money realized by sale of its products.
Overdraft supported by industrial mortgage Manufacturing company Purchase of industrial land and putting up of a large building for operational business activities Not Good Overdraft over Mortgage are more suitable for short term mortgages, say 2-3 years,they carry higher rates of interest Long term mortgage options,say flexible mortgage,benefits include lesser interests and tax savings.
Increase in existing term loan on farm property supported by mortgage on farm Wealthy consumer Purchasing of a seaside apartment for investment purchases Good Term Mortgages are appropriate forms of financing for purchase of property. Extension of mortgage is time saving as it does not require the repetition of procedures .
Foreign currency seven year variable rate loan financed from bank’s own foreign fund pool and supported by mortgage on financed chattels Medium size business Local interest rates in this country regarded as extremely high. Foreign rates much lower for purchase of manufacturing equipment. Good Global markets should be accessed for getting best deals.
Increase in residential mortgage Consumer Buy new car. Sufficient equity on existing house mortgage Not good Car loans are priced differently than property loans ,they are for short time periods and the interest rate is much higher Car loan/Personal loan
Personal loan Farmer Interim 8 month finance required to cover costs of planting wheat on agricultural property. Loan will be repaid after harvesting. Not Good Loan supported by sufficient collateral Very high risk if not supported by collateral
Factoring of debtors Small business with good debtor book but no collateral to provide to bank Working capital to assist business with seasonal liquidity requirements Not Good Overdraft Debtors have not entered into any agreement with the banks. Hence applicant should rely on Self resources, outstanding accounts receivables, mortgage agreement.If he still has to seek loan he can seek overdraft, but repay as soon as he realizes outstanding payments.
Increase in credit card limit Consumer Finance of best holiday ever Good if accompanied by higher balances Increase in credit card limit has to be accompanied by higher balances and higher interest rates.