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) Given that the Current loan portfolio consists of

Motor vehicles : 30%

Mortgage loans : 40%

Credit card advances : 30%

As per the information there is a spike in demand for motor vehicle loans. So by lending additional amount for motor vehicle purpose, the impact on the portfolio would be, the current share of 30% in the portfolio will rise up, forming major part of the portfolio taking down mortgage loans.

(ii) We should advise the credit manager on structuring the portfolio, that despite the increase in demand for motor vehicle loans the credit manager should structure the portfolio in such a way that motor vehicles loans wont go beyond 50% or more as there is increased risk of default for a particular type of loan domain. In order to redue the risk of default the loan manager should equally generate additional mortgage and credit card advances in order to keep the structure of the portfolio intact.