Question

A commercial bank with a structured loan portfolio as shown below is faced with a spike in demand for car loans from individual clients.

i. What advice would you give the credit manager as to the impact of the spike on the overall risk profile of the lending portfolio which currently stands at:

Motor Vehicle loans: 30%

Mortgage loans: 40%

Credit Card Advances: 30%

ii. What are the risks would you advise the credit manager to consider in the structuring

of motor vehicle loans, given the demand.

Answer 1

(i) A increase in motor vehicle loans will impact the lending of mortgage loans and credit card advances. The credit manager has to check of the increase is in demand of used cars or new cars. Since used cars carry more risk, the portfolio increase must be restricted. Also, the demand has to be compensated by foregoing credit card lending as it is unsecured loans.

(ii) Some of the check points are:

1.The overall profile of the borrower

2. The cost of the vehicle and if it is a used car , the appropriate valuation of the car.

3. The lending rate and the loan to asset value

4. The tenure of the loans must not be too high and restricted to borrowers whose profiles are risky.

5. Cars must be categorized into premium and non premium and lending must be restricted to that segment which has been not behaving well.