Question

In the effort to distribute small business loans under the CARE act to those being affected by the current crisis, many financial institutions state that they will put a priority on borrowers who already have an established relationship with them (e.g., preexisting loans, business credit cards, etc.).

However, the pool of funds approved by Congress can dissipate quickly due to huge demands and borrowers at the back of the queue might not get anything if not served promptly.

Question: Discuss the business and ethical implications of the banks' actions and comment on how you would do if you were a lender.

Note: Answer has to be in 250 words and please do not copy and paste!

Answer 1

From business standpoint, it definitely makes sense that banks would want to extend loans to individuals who have existing business relationship with banks. A familiarity and the strength of the historical repayment does reduce the risk for the banks and as a result they are more comfortable in extending loans to these customers.

Making loans to customers who don't have any previous history with the bank increases the risk for the banks and makes the underwriting process more complex and difficult.

However from ethical standpoint, the perspective is completely different and contrary to the business position. Extending loans only to know customers defeat the purpose of the program and deprives those in need of credit to the much needed funds.

So as a lender one should work towards a portfolio of loans with some to known credit worthy customers and others to customers hitherto unknown but having sound plans and financial capacity.