BUS308 Credit and Lending Decisions For Commerce National Bank

Answer:

Special risks to the Commerce National bank

Risks in the banking industry refer to the unplanned events that result in financial consequences due to the reduced earnings or a loss. A bank or any financial institution. 

From the Athletequip Company Inc. Analysis case study, the Commerce National Bank in Alhambra is likely to incur the credit risks if it lends out the required money, which is more than the usual lending limit to the company for expanding its businesses, due to borrower risk. This is because there is no guarantee that after the expansion of the business the returns will be positive.  Furthermore, with the change in the management of the bank, the new team might not suitable policies that would ensure the operations are sustainable with lending out large amounts of money to their prospective clients. The bank might also incur strategic risks with the change in management. With the many critical financial decisions to be made, the new team might not incorporate all the necessary procedures from the short hand over period. For instance, failure to lend the money to the Athletequip Company may result in losing the long-term client to the bank as well as ruining the reputation of the bank to other big business players in the market. A positive reputation is likely to earn a business organization fortunes such as possibilities of acquiring new clients and maintaining the existing clients as well. However, a negative reputation can tarnish the image of the business, which can lead to loss of its clients and poor returns. Therefore, the bank managers in the case study should practice caution with critical analysis of every decision they make before implementing it into action.

Special risks to the Athletequip Company

With the desire to expand the business organization, the Company opts to borrow an amount above the limits it has been borrowing in the previous years. This can be seen as a financial risk in case the intended expansion does not work out well for the company. Moreover, if the bank having the new management decides to decline the loaning offer, the company might be seen as a bad debtor by other banks or financial institutions. With the uncertainty in the market trends, the company could purchase the anticipated equipment at the borrowed cost which might take a very long time in repaying the money should the market turn out to be unfavourable to the company. From the unaudited financial statements, the company was reported to have maintained a substantial financial state with its net worth registering an increase from the past years.

The company could utilize some of the assets for the expansion and operation of the business instead of opting for the loan which could incur high interests as the new team of bank management takes over. This could make the company be a long time debtor to the bank with unbearable interest rates. However, in case the company decides on liquidating some of its shares, there could still be the risk of its shares depreciating in value which could lead to the withdrawal of major shareholders in the company. With the long-term good relationship with the local bank, the need to expand the company based on the loan comes at an inappropriate time for the company due to the uncertainties that come along with the change in management of a business organization. This could be a huddle in assessing the required amount as a loan in the first place.

Profitability ratio analysis

The profitability ratios are claimed to be the financial ratios of a business organization with regard to its investments or the sales. The diagram below helps to distinguish different ratios based on the sales and the investments of an organization. 

The table below shows a section of a profitability ratio analysis for the Atheletquip Company.

Profit margin Ratio

The company’s earnings were recorded to have increased in the year 1991 from the previous year and then decreased in the 1992 financial year. This led to a profit margin of 3 %, 3.8%, and 1.8%  of the total sales in the financial years of 1990, 1991, and 1992 respectively. The profit margins for the three different years were calculated.

Return on Equity Ratio

From the financial statements, the Athletequip Company registered an increase in the profits generated by the stockholders’ investment between the year 1990 and 1991. The increment recorded was 2.1% after which the percentage in the profits decreased by 7.3% in the precedent year. This profits generated from the stockholders’ investment is called the return on equity ratio which was calculated.

Return on Assets Ratio

The utilization of the assets by the Athletequip Company increase from 8% to 10.1%  between the financial year 1990 and 1991. However, the Company registered a decrease which added up to 4.4% of the utilization of the assets in the following year 1992. These were calculated using the formula.

Credit and Lending Decisions

Abstract

Credit and Lending are some of the financial services greatly contribute to the bank revenues. The banks deliver many services whereby most of them are related to credit, for instance, cash management, checking accounts, business loans, and payment services. The banks offer loans to the customers or clients as a financial solution who are obligated to repay the amount with agreed interests on the payable principals. However, in so doing, the banks and lending shops always incur the risk of bad debts despite all the guaranteed assurance from the clients. These risks in most cases can easily shift the performing loans to non-performing loans (NPLs) or even the impaired losses (Messai and Ahlem, 2013, pp.852-860). Even though the lending shops and banks may be involved in many types of risks, the credit risk is claimed to be the major threat to the financial performance of the lenders in the lending market.

With these mentioned reasons, the measures for risk controlling credit activities are critical in the banking sector, which calls for the managers and the experts to formulate the solutions and implement sustainable measures to minimize the credit risk and the bad debts. In the assessment of the approval of loans by the lenders, it is established that there are four types of loans, which are, real estate loans, consumer loans, business loans, and Government sponsored loans. The lenders are mandated to establish their lending policies, which should conform to the respective Government lending policies. Reports indicate that the most type of loans that are applied for are the business loans which are based on the customers’ trust with a well-established contact information. According to (Liu et al., 2017), the lending firms make good returns on the performing loans if they have appropriate means in place that facilitate low operation cost for successful collections operations.

Introduction

The credit and lending decisions unit provide insights into the perspectives of the lenders on the consumers and businesses’ profit credit risk assessments (DeZoort et al., 2017, pp.302-315). In addition, the unit also gives a critical review of the aspects of financial services risks to the firms, management, analysis, and the lending functions. The key topics covered under the Credit and Lending decisions include: Credit risk management and modelling, the principles of lending, small businesses finance, analytical tools for investigation of creditworthiness of borrowers perspective, the business analysis and personal loans, project finance, corporate lending, securitization, leasing, problem loan management, and credit derivatives among other additional topics.

These would enable the collection managers to make adequate decisions that would ensure the sustainability of the businesses in the market at a lower cost and help to minimize the risks of loss rates from the borrowers. However, the core purpose of this paper is to bring to the light the comparison and contrast of these topics covered under the Credit and lending Unit with the issues outlined in the article of the seven pillars of collections wisdom (Higginson, Jacques, and Rudisuli, 2018). In the processes, this would bring the relevance of the article and help to give a broader understanding Credit and Lending Decisions. 

The state of Collections market

Reports have indicated that in the recent past, managers in some collection markets are increasingly facing the rising delinquencies and leaned-out shops as well as the burden of the costs. It has been claimed that the low loss rates have resulted into the lenders reducing the sizes of their collections operations in order to minimize the costs with a focus on efficiency in most of the collection markets (Iqbal and Asif, 2015, p.231). Furthermore, the low losses also led to acquisition criteria of a relaxed nature, which directly affects the customers with a low credit score with a riskier product offer. Contrary, as the consumer revolving balances and spending increased, their delinquencies were reported to go high as well. With the rising loss rates, the lenders in the market found themselves the victims to understaffed personnel with lack of the adequate tools that could enable them to address the issues of their at-risk accounts. Therefore, the article presents the new approaches that can help the lenders to achieve best-in-class collections operations, lending decisions, and improving revenues thus lowering the costs (Grant, 2016).

Overview of distinctive collections operations  

It has been acknowledged that the return of the higher loss rates has not been properly addressed, as there has not been a substantial rise in a sophistication in the processes of collections operations (Chmielewski et al., 2017, pp.29-39). It has been reported that many shops in the market are still being organized by a delinquency state where they still rely on cell phones to get in contact with the customers. The managers rely on the risk segmentation for the first few weeks where they assign a live agent to the customer and afterwards the customer follow up by the agent declines and therefore, increasing the risk of higher loss rates. In addition, the contact channels to the customer are rashly adopted without an evaluation to determine which communication channels are suitable to a certain category of the customers. This generalization of contact channels leaves some customers out of the metrics of the collections market making some to be inaccessible during the payment of the loans to the lenders.

Reports further indicate that many customers actively ignore the phone calls from the lenders bearing in mind that the agent is not actively involved nor physically traceable. Due to the lack of sophistication in collections operations, other challenges are likely to emerge with common ones being the customer-protection regulations and prevalence of the debt-collection agents or companies’ determination of enlisting long-term customers. Below is a diagrammatic sample of a collection process, which shows contact of the clients at different stages in the process of collections operations.

Although the major issues in every market face the same macroeconomic pressures, they face a varying range of performance in collections operations. Apparently, most managers in the collection market are prone to abandoning a high portion of delinquent customers without ever contacting them directly. This imposes a great risk, as a slight change of the account-holder contact information would lead to the disappearance of the customer. The lenders need to improve the strategies of locating an effective contact information for making the right customer contacts (Orenga-Rogla and Sergio, 2016, p.1462).

Concisely, the recently advanced collection shops in the market are gradually making the use of advanced analytics, machine learning, and value-at-risk segmentation in their collections operations. The implementation of these tools would help the lenders to establish a close relationship and a more production attention to the customers. The value at risk is furthermore changing the collections operations with a close establishment of sophisticated contact information to the individual customers thus minimizing the risks of higher loss rates. In order to make a successful collection operation, it does not require the input of high IT investment but rather the frontline involvement of the customers, well-trained staff, and an actively performance managers that could utilize the daily data and report according to (Fedaseyeu, 2015).

Similarities in the article and the Credit and Lending decisions unit.

The importance of segmentation in collections operation is depicted in both the unit and the article. It is stated that where there is a limited collector capacity, segmentation is vital where the shops keep a track of the number of days that the accounts are delinquent, most collections operations prioritize the customers by the value at risk (De Keyser et al., 2015, pp.453-456). This implies that those customers who have a higher outstanding balance are prioritized and therefore, they are contacted and reached out to before embarking on those customers with lower outstanding balances. To achieve effective segmentation, both the article and the unit course explains that the lenders are using the models resembling those used to underwrite the consumer credit in assessing the collections risks. With the use of segmentation, it is possible to distinguish customers who will respond to the automated messages to those who will require human contact. Additionally, behavioural segmentation discussed in the lending and credit decisions is vital in the evaluation of value-at-risk (VAR) segmentation and identification of behavioural clues to the customer receptivity towards the particular means of contact and approach in collections operations processes.

Moreover, another similarity clearly drawn is the suggestion of the use of skiptracing practices by the banks and the lending shops in the collections operations (Woodard, 2018, p.239). In skiptracing, three levels of activities are usually implemented depending on the duration of intervals upon which a successful contact was made to the customer. For the accounts without successful contact within a period of a month, the use of semi-automated batch skiptracing is common. The files containing the customer details are submitted to the credit bureaus, which provides a feedback to the banks or lending shops with additional information, which could help in contacting the customer. It was reported that most customers are charged for failure to settle their debts in time but one of the major reason turned out to be lack of contact with the customers. With failed successful contact, the banks charge off the customers who are linked to fraudulent or some declaring bankruptcy but many are charged off simply the collectors were unable to establish a contact with the customer. Therefore, the use of skiptracing could be helpful in getting access to the customer contact.

The contact strategy is another aspect discussed in both the article and the unit course of credit and lending decisions. Research indicates that the varying intensity of calls can help along with the provisions of options for customers to choose a contact channel. The collectors have recognized that the customers gain a sense of empowerment that promotes engaging experiences when the customers are given options on the pace of repayment, the means, and the channel contact (Harmeling et al., 2017, pp.312-335). It is also highlighted that some customers especially those advanced in age are more comfortable with non-voice engagement such as text messages, emails, and postal letters among others while some customers, who are young are comfortable with brute-force dialing. Therefore, it is brought to light that the selection of the communication strategy is very significant in collections operation.

The frontline capabilities is another vital subtopic in the collection operations. The lending shops are always obligated to have a skilled, well-trained, and motivated workforce that is always objected to successful collections operations (Edinger-Schons et al., 2018, pp.1-15). The frontline collection is recognized to be a challenging practice than the call centres. The collection staff need an intensive financial education that will enable them to face the furious and frustrated customers in a polite and convincing in the collections recovery process. With the collection pressure, the lending shops are always subjected to; the success is heavily banked on the collection staff to achieve the successful collections operations. Therefore, continuous training of the collections taskforce is very vital.

The performance management and organization are also highly advocated for in both the contexts. It is recognized that the roles of a collector can be mentally derailing and monotonous. The dire financial circumstances of repeatedly speaking to customers with barely making successful collections can wear out nerves. To prevent the staff from these, performance management and organization are discussed as major approaches that would enable a sustainable successful collection operation. The staff need an on-going coaching with performance metrics such as rewards and recognition to the most performing staff (Falola et al., 2014, p.161).

Differences found in the article and the Credit and Lending decisions unit.

In the efforts to bring out the best practical approach of implementing effective collections solutions, there are a number of contrast in the approach outlined in the article and the credit and lending decisions unit as seconded by (Ahmed, 2017, pp.428-450). For instance, in the article the, the practical approach to as successful collections operations is outlined to be oriented in three stages with the first stage being an assessment of capabilities. The stage is aimed at identification of strengths and opportunities where the current performance is compared with the past performance and the competitor benchmarks. However, the Credit and lending decisions unit offers practices based on striving to create proactive strategies that help to diminish the occurrences the overdue loans at a minimal cost. For example, the practice to adopt the proactive strategies to avoid the delinquency before it starts involves the education of the borrowers about the product features and collection charges and fees, which is contrary to the approach in the article.

Additionally, in the article, the second step is the creation of the project teams where the members are required to work on the specific elements of design for the new solutions. The managers are assigned to keep track on the project as well as to remove the bottlenecks quickly with the agile decision-making (Das, 2016). In contrary, in the adaptive strategies outlined in the unit course, the second step is to establish a mutual agreement of payment dates between the customer and the lending shop or the bank. In this approach, the establishment of an efficient relationship between the customers and the lenders is emphasized unlike the establishment of teamwork approach in the article.

Finally, the last stage of a practical approach to creating effective collections solution is to implement solutions in the test mode with the needed revision. This involves the identification of successful initiatives with aims to improve the sustainability over the intended initiative life. This is quite contrary to the approach in the course unit, which addresses the customer-service complaints. The approach claims that the timely attention to the complaints, the staff are able to address the clients concern before they result in the late payment (Skinner, 2016, p.1). The approach further advocates the use of a positive reinforcement and the reward of clients who pay on time by offering them immediate renewals, which is contrary to the approach in the article.

Conclusion

In conclusion, there is need to adapt to the ever-changing demands of the credit environment by the collection shops. Pursuing a smaller number of substantive initiatives that might transform the operations in the digital and value-based directions. However, in the collections operations, there are no formulas for success but leadership must be committed to implementing new solutions for the employees to take ownership and succeed. The core role of leadership in business is to create a compelling environment that enables collections operations in the credit and lending decisions (Bolden, 2016, pp.143-158). With the implementation of the seven pillars, collection operations can generate a positive return in the market competitors.

References

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