Question

Synopsis

Pages 35-38 of the Small Business Lending for Economic Development - Volume II: Model Urban Programs text source details the origination of a bank community development corporation (CDC) -- Mellon Bank Community Development Corporation (MBCDC). The text mentions that the CDC was wholly-owned by Mellon Bank Corporation at the time it was written. This CDC was established in 1986 with the purpose of serving the credit and investment needs of "modest-income" communities in Mellon Bank's service area. The bank community development corporation model removes a few of the regulatory constraints banks face, so It was deemed best suited for the aforementioned effort. The structure allowed MBCDC to tailor specific skills and products to historically underserved markets. Essentially, MBCDC possessed the ability to provide subordinate debt and equity financing in ways that could benefit minority-owned, modest-income borrowers--and firms considered to not be conventionally bankable.

MBCDC grew exponentially and at some point began to lend at a substantially larger scale (1989). The following excerpt details MBCDC's four-stage process for packaging and funding projects:

"…it first looks to structure deals using conventional bank products. After identifying gaps that the bank cannot fill, MBCDC then looks for government enhancements, such as SBA guarantees, to make projects feasible. If further enhancement is needed, MBCDC identifies the amount and structure of its own participation that is required. Finally, failing to identify sufficient financing from all of these sources, referrals to finance companies or equity investors may be required" (Immergluck, and Weinstein, 37).

"In addition to loans for a variety of business needs, including working capital, MBCDC makes loans for commercial real estate, dental and medical professionals, and contractors. MBCDC also finances housing projects and community development organizations" (Immergluck, and Weinstein, 37).

Critique

I personally was delighted to read about an effort to strengthen minority-owned, "modest-income" businesses. Addressing economic issues in underserved communities, markets is necessary to improve the overall economic wellbeing of a community.

From the data (numbers) provided in the text, I would have to say that MBCDC made great progress toward their original endeavor. The organization grew from $500,000 in capital and $3 million in a line of credit to capital and investments totaling over $10 million within 8 years--awesome.

Lastly, I believe the advantages the MBCDC's CDC structure conferred on the organization contributed largely to the organization's overall success--in regard to its mission.

Discussion Questions:

1. What are your thoughts on the advantages and disadvantages of organizations like MBCDC operating separately from a parent institution such as Mellon Bank?
2. Would an effort with a similar mission as MBCDC's (to serve the credit and investment needs of modest-income communities) benefit your (immediate) community? If you are aware of any... please share : )
3. Can you think of other funding options/methods/strategies that could have (, or could presently,) worked just as well as… if not better… than subordinate loans?

Answer 1

Introduction

For the success of any economy, capital generation is one of the biggest factors that effects the overall health of the community and the social status in which the country sees itself.

Successful countries such as the United States, have been rapidly able to grow because of the high capital availability and forces such as venture capitalists which have given ideas the form of companies which have seen rapid growth over the years. Developing and underdeveloped countries on the other hand are never short of ideas, but rather find themselves doing poorly because entrepreneurs and small business owners find themselves in financial trouble, unable to find sources of capital, or finding those which charge extremely high bank interest rates respectively.

The case today, clearly highlights the importance of micro-financing agencies in economic growth and development of industries which are bankable yet might not be able to get sufficient credit because of lower ratings/repayments or otherwise because of their lack of having enough mortgage respectively.

Case Specifics:-

1. What are your thoughts on the advantages and disadvantages of organizations like MBCDC operating separately from a parent institution such as Mellon Bank?

The advantages of operating a separate institution for catering to the needs and wants of the smaller sector are as follows:-

• The bank or subsidiary can find itself well positioned and undertake independent research and development of microfinancing which will strengthen its profits, give it a better idea on how to cater to the needs of specific set of customers which are different in nature.
• The subsidiary sees the entire project as one and can focus on generating revenue in a better manner. Strategic banks not having any subsidiary take a holistic view and such areas require time for taking out revenue which bigger banks find nonprofit making and are often reluctant to invest in.
• Once established they hold a stronger position in the minds of those who seek loans at the lower levels which generate relatively lower revenue. These business holders find it easier to approach smaller subsidiaries since their requirements for granting loans are relatively lesser. Further marketing becomes relatively easier
• The interest rates though, relatively lower than market lenders tend to be higher than other banks subsidiaries offering loan for business purposes typically charge higher interest rates thus earning higher profits than others respectively and making more profits as in the case above highlights.

Disadvantages:-

• The major disadvantages that opening subsidiaries which promote micro-financing is that they reach out to a specific set of people and others having different requirements like bigger business owners cannot be catered to since they do not prefer banking with these names. Thus the company loses out a lot of high value business opportunities
• The parent company in most cases is capable of withdrawing capital earnt phasing out the whole concept of decentralization. As funds relatively lesser are available the company becomes cautious in return because of lack of capital
• Bad debts is a big problem for these companies since the loans are rendered to business that relatively generate marginal revenue when compared to bigger names respectively.
• The documentation part is still required which most business owners particularly in the developing economies do not tend to have, which in turn makes them vulnerable to high interest charging market forces respectively.

1. Would an effort with a similar mission as MBCDC's (to serve the credit and investment needs of modest-income communities) benefit your (immediate) community? If you are aware of any... please share : )
2. Can you think of other funding options/methods/strategies that could have (, or could presently,) worked just as well as… if not better… than subordinate loans?

Such banks, offer loan to only bankable institutions which have relatively lower returns on investment but have a strong banking background or a mortgage to offer even if it may significantly will be lower.

In the United States and otherwise, in developing countries such as India or others primarily all entrepreneurs finding their way in different industries need to approach venture capitalists for solving their capital requirement problems.

As a result, the micro financing sector sees the rise of private market players charging interest rates which no one can pay considering the fact that they are in the nascent stages wherein profits take time to build.

Therefore, as a suggestion, banking institutions are required in the entrepreneurship sector as well to ensure that ideas which are marketable and will see themselves as business are covered.

This will help all communities in being independent and able to generate employment and revenue respectively.

Please feel free to ask your doubts if any in the comments section.