Bank Loans in Challenging Economies
Instructions: Based on the provided case scenario and spread sheets data, answer following question:
Should the bank extend the maturity of the current loan and approve the additional loan? And what terms and conditions should the bank impose to reduce the risks of the loan to the bank?
Solution.
Bank Loans in Challenging Economies
In a challenging economy, offering loans to individuals and businesses is very risky. Banks may offer large loans to businesses, which may end up becoming bad debts, leading to preventable loans. To avoid such risks, banks should impose policies that ensure that the bank can recover its money even if the business fails. In light of these risks, this essay discusses a case scenario and proposes some policies to help avoid risks.
From the case study and the exhibits, it is clear that the Jackson is reaching its forecast values. This, however, is being challenged as the shipments get interrupted and the firm’s equipment are getting worn out. Worn out equipment mean that the company will not be able to handle their various operations as expected. There is proof that the company can recover, just like the Big Three US companies. But this can only be so if Edwards can convince James to offer him an extension of the loan maturity date and an extra loan.
Since the extra loan is needed for improving the equipment, and Edwards is making deliberate efforts to minimize their capital expenditures, the Edwards’ plea is well founded and has some potential. If the bank wishes to recover its loan, it must help Jackson company to recover. One step in ensuring this happens is by offering them a loan for repair of their equipment, which is expected to raise the rate of return.
However, the bank should be vigilant and careful to avoid losing their money. To ensure that cases like Jackson cannot pay its loan and the extra loan, the bank should make a policy requiring that Jackson gives 50% of its shares to the bank until the loans are all repaid. It should also put in writing that in case the company fails to repay the loan, it will sell the company’s assets to obtain the equivalent amount.