Question

Q. Explain how finance companies finds a competitive place in fundamentals markets considering that there are almost 8,000 depository institutions in the US, all of whom are active lenders?

Q. Explain the principles driving credit risk at the portfolio level. Is there a difference between the methodologies and tools available to very large banks compared to smaller community banks?

Answer 1

I shall give a fair idea about the question and leave it on you how you decide to interpret.

1. Competitive place for any finance company in the fundamental markets, considering a huge competition.

- Almost 60% of the companies would be backed by Sharks or big multinational, so in this case the downside risk is very less. Competitive and highly qualified analyst would make their job easier.

- There are multiple ways of bulling a finance company in fundamental market, which can start with;

a. Giving support to the existing finance companies, the bigger the brand you support the better the brand value grows

b. Continue with the practice and start sharing the research in the open market, so that people going for the paid research report of the competitors will also look at freely available report

In case you are doing very good in your business, even then also you have to compare the reports of the top players in the market and think of any more value proposition

c. Companies should not think of doing big at once in some years, taking baby steps and most importantly being in the business make it possible

d. Lenders will always have an advantage of getting the maximum business, but in case the service you provide is much more valuable than lending then business would keep growing

e. Adding more technology to finance i.e. more better way of engaging customers will add up to the business

2. Principles driving credit risk at the portfolio level. How methodologies and tools are different from large banks compared to smaller banks?

- Credit risk is borrower's default in payment as per contractual obligation. Can be evaluated based on various measures e.g. repayment capability, collateral value with liquidity, credit history of the firm, etc.

- Individual firm do not decide their own credit worthiness, there are credit rating agencies e.g. CRISIL, ICRA, etc valuate the firms for credit rating, which decides the credit risk at various level of equity, bonds or portfolio.

- The methodologies and tools are same for big as well as small banks. For big banks the ratios e.g. liquidity, CAR, Basel Norms, etc would be in a safer side to keep the investors safe.

- You can also see with rating of the companies coming up or going down without appropriate notice. Can be easily seen when the interest rate drops or surges.

Hope this helps. In case you find it helpful then give a thumbs up.