Seoul National Bank: The Chief Credit Officers’ Tough Decisions Case Study Solution
Part 3
The loan request 12 is supposed to be granted. The amount of loan is assumed to be $831 million along with the industry code is J. This request of loan involve medium business risk and medium financial risk, depicting 2.91 percent rate of default along with the interest spread of 474.3. The information provides the total amount of loan of $831000474 which includes the interest earned with the interest spread of 474.3. Thus, it is analyzed that the total profit is minimum due to the minimum rate of interest, but the loan amount also provides the minimum rate of default. According to the concept, the higher return is related with the high risk. In this case, the risk is low but the results are also low.
The rate of default is the minimum rate representing that this loan amount has the minimum default chances and loan that are representing the financial and business risk of the company are low. In case, the company would default in the near future, the 95 percent would be the most collection percentage of the high score of financial risk. If the company would default in the near future, the company would be able to received $765268336. So, it is to conclude that this loan has the low business and financial risks with the minimum of 2.9 percent default rate.
Part 6
In the designing of portfolio, the return and risk play inevitable part in selecting the available request for loan. SNB has the policy for restricting the loan granted for further borrowing to the company due to the reason that it would reduce credit worthiness of the company and add more liabilities. Assigning the portfolio is one of the complex and difficult tasks due to the day to day changing market conditions and the tough competition. It tends to require more insights towards current affairs as well as continuous improvement in the assigned portfolio. In this case, the portfolio is for 1 year only and does not require continuous improvement. This portfolio would result in lower returns because of the reason that it carries lower risk.
Taking under consideration the assumption that the default rate must not exceed 10%, the IF formula is used to evaluate the default rate below or less than 10% to accept and reject the loan. The analysis shows that there are 103 loans that would be accepted out of 168 loan request based on the default rate. Additionally, there are 103 loan request which fulfilled the criteria specified by Mr. Change such as; the allocated amount should not exceed the requested loan amount, the default rate must not exceed 10 percent and so forth. Due to the similar risks related with each loan request, the amount of portfolio of 70 million dollar is equally split among the loan request. By allocating the 70 million dollar on these loans, the company would be able to receive the enormous amount of money in case of default under the wait and see strategy.................
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