Seoul National Bank: The Chief Credit Officers’ Tough Decisions Case Solution
There are three collection strategies as mentioned in the case, which include the collateral liquidation, partial settlement strategy and the wait and see strategy. On the basis of analysis; it is finalized that the Seoul National Bank should follow the Wait and See Strategy. The Wait and See strategy is suggested to be implemented because it enables the bank to collect more amount of recovery over the time, if any of the borrowers defaults on the loan, including the principal and the interest payments. If the partial settlement strategy is compared with the wait and see strategy, then the wait and see strategy would enable the bank to get more recovery collected over the provided loans. It is because in partial settlement the bank would be receiving a certain percentage of the loan and most importantly it would destroy the bank’s reputation and its relationship with its customers, in future. The partial settlement in terms of equity would provide the company with the equity equal to 50% of the provided loan and the bank has to face 50% loss in the remaining recovery of loan. Similarly,if the bank opts for the collateral liquidation strategy over the default of the borrower, it would have a negative and severe impact on the defaulter’s-operations, as the bank would be selling out eth company’s assets in order to recover its provided loan. Not only this, this action would also create significant gaps between the bank and its customer, ultimately impacting the CSR of the bank. Comparatively, the revenue or the loan recovery would be the highest and the risk of loss would be low in case of the wait and see strategy. In addition this strategy would lead to a development of long term relationship between the bank and the borrowers. The bank has the opportunity to provide the loan at a higher rate over the same loan upon the maturity date of the loan and it wouldn’t be affecting the defaulter’s assets and operations. By using this strategy, the bank would have to bear the financial risk only as compared to the business risks in other strategies. So, on the basis of aforementioned points; the Wait and See strategy is considered to be best collection strategy for the recovery of loans provided.
On the basis of the students’ number, i.e. 885, the loan request number 85 would be granted. Loan 85 has a total amount to be granted of $937,000,000. The firm, to which the loan is granted,would be identified as belonging to the industry with code “G”, i.e. retail and wholesale industry. The financial risk of the loan is assumed to be low and the business risk is identified to be medium. Overall, the low medium rating is assigned to the overall loan structure.
In addition, the probability of the default over the loan is determined to be less as it can be observed from the default rate of 2%. There is an interest payment of $455.3, which led to total loan amount of $937000455 (See Excel Sheet3). As it is a well-known fact that, the higher the risk; the higher is the return. But in this case, the revenue generated by the bank through the loan is quite less due to lower interest rate, but the risk involved in the collection is also low. The risk upon the loan granted is analysed to be low as represented by the default probability of the borrower. In addition, the business risk is analysed to be medium but the financial risk is low, which indicates that the bank would be able to get its loan recovery………………..
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