The value of the banker-customer relationship: ECONOMIC CONSIDERATIONS

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The value of the banker-customer relationship: ECONOMIC CONSIDERATIONS

The fact that banks, as lenders, should be able to pursue profitable lending opportunities is not in question. What is questioned, however, is the time-scale over which such profits are measured.

In the short term it appears that banks have profited enormously from the unprecedented demand for unsecured consumer credit. Annual growth rates in credit card debt, for example, calculated as part of the money supply (M4) consistently exceeded RPI inflation by two to three percentage points between 1996 and 1998. Over the same period bankruptcy and IVA numbers have grown and are now maintained at a higher level (total estimated at 28,000 for 1999) than at any time since the recession of the early 1990s. In 1998-1999, total insolvency growth outstripped the growth in consumer credit with IVAs maintaining their ‘share’ of cases. Petitions for bankruptcy also maintained high numbers, with around 65-68 per cent of all petitions being granted and debtors being made bankrupt between 1991 and 1998.

Where banks hold unsecured debt the tendency in corporate insolvency has been towards liquidation (bankruptcy) rather than rescue or rehabilitation. Smaller businesses appear not to warrant bank involvement in workouts and the same policy appears to be adopted for unincorporated businesses and personal debtors. This approach is typically justified by banks on the basis that there is no point in ‘putting good money after bad’ (sic). The financial argument for this is clear: the amount of debt written off (debt less recoveries) can influence specific provisions for bad and doubtful debt, net profits and tax charges. Transaction costs incurred in account intervention will merely add to losses in the short term.

The longer-term economic argument is less clear but sees write-offs as ‘sunk costs’. Normal costs of extending credit must take potential losses into consideration and be discounted in the risk-related interest rate charged. The decision to invest in relationships with debtors should not, therefore, take the bad debt loss into account. Instead, the decision should compare the risk-weighted ‘lifetime value’ of the debtor against the cost of a more detailed investment in customer rehabilitation.

In a congested and competitive market such a policy may be more commercially viable in the longer term, especially where both legislation and social values seek to encourage ‘serial entrepreneurs’ and where large numbers of bankrupts are repaying nothing to their lenders. Taking a slightly different perspective, customer information relating to crisis and rehabilitation could eventually lead to danger signals being recognised much earlier in the day, allowing banks to take preventative action and, perhaps, even avoid the need for bankruptcy and IVAs.

 

Representative APR 391%

Let's say you want to borrow $100 for two week. Lender can charge you $15 for borrowing $100 for two weeks. You will need to return $115 to the lender at the end of 2 weeks. The cost of the $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you decide to roll over the loan for another two weeks, lender can charge you another $15. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.

Implications of Non-payment: Some lenders in our network may automatically roll over your existing loan for another two weeks if you don't pay back the loan on time. Fees for renewing the loan range from lender to lender. Most of the time these fees equal the fees you paid to get the initial payday loan. We ask lenders in our network to follow legal and ethical collection practices set by industry associations and government agencies. Non-payment of a payday loan might negatively effect your credit history.

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